Reviewed by Sep 30, 2020| Updated on
Income tax laws in India has a host of provisions that provide deductions from your total income, thereby reducing your tax liability. Interest income has also got some deductions. Apart from this, there are some types of income against which we can reduce the related interest expenditure. It will also ultimately reduce the tax liability.
Tax-deductible interest refers to a borrowing expense that a tax assessee can claim in his income tax return to reduce the taxable income. The types of interest that are tax-deductible include housing loan for a self-occupied property or let-out property. Further, the education loan interest and the interest on working capital loans used for business purpose are included in the list.
In Union Budget 2019, new provisions were added for interest deductions under the chapter VIA of the Income Tax Act. It includes deductions of the interest paid on loan taken for financing the purchase of electric vehicles.
The amount of tax that one can save based on the interest deduction taken will depend upon the income slab under which the assessee happens to fall.
To understand who is eligible for the tax-deductible interest, we must look into the different provisions of the Income Tax Act.
The popular tax-deductible interest is the interest on housing loan. The interest that is expended on the housing loan during a financial year shall be eligible for deduction from the total income. A housing loan must be taken for either the purchase or the construction of a house. The construction should get completed within five years from the end of the financial year in which loan was taken. The extent of the deduction depends upon whether the house property is self-occupied by the assessee or rented out. Also, the income tax law provides for deduction of pre-construction interest in five equal instalments. It starts from the year in which the property is acquired, or construction is completed, over and above the claimable deduction, capped at Rs.2 lakh. For a let-out property, there is no upper limit for claiming interest. However, for a self-occupied property, the upper limit is rupees two lakhs. It is referred to under Section 24 (b) of the Income Tax Act.
The next popular deduction of interest is from the savings bank interest income. Individuals can claim the deduction under Section 80TTA to the extent of Rs.10,000 or the amount of interest income from savings bank accounts put together, whichever is less. For senior citizens, the upper limit is Rs.50,000.
The next most common deduction is the education loan interest under Section 80E. There is no limit on the sum of interest that can be claimed but the number of years for claiming the deduction is restricted to eight years. However, certain conditions must be fulfilled.
A provision under the Income Tax Act is present to allow the deduction of interest paid on an electric vehicle loan to a maximum extent of Rs.1.5 lakh, subject to some conditions.
At the time of submission of income tax returns, a tax assessee should ensure that the necessary evidence for paying the interest during the year is on record. Usually, in case of a salaried individual claiming this deduction, the employer would have considered for this deduction during the year while computing tax deduction at source. Accordingly, the employee assessee should submit the final interest paid certificate obtained from his banker.
The tax authorities can ask for proof of deduction at the time of processing returns for the rest of the cases of tax-deductible interest.