What Are The Car Loan Tax Benefits For Self-Employed And How To Claim Them?

Fleet Management


The word tax exemption implies no income tax obligation on a particular transaction. In India, loans, tax deductions, and tax exemptions go hand in hand. There is a tax exemption provision for education car loan, home loans, and even some personal loans.

Now, what about car loans? 

Is there a provision for tax exemption on your car loans as well? 

What are the car loan tax benefits for self-employed?

Read along to learn more about using your existing car loan to reduce income tax liability and manage your finances efficiently. 

Also read: Get Attractive Look of your Vehicle by These Changes

Who is Eligible for Income Tax Exemption on Car Loans?         

Tax benefits on car loans are available for all vehicles purchased for commercial purposes. In other words, only self-employed individuals like lawyers, doctors, CAs, or business owners can avail themselves of tax benefits for cars purchased for commercial use.

No tax exemption or benefits are applicable for salaried individuals. This provision is made because those cars are for personal use. 

Workings of Tax Benefits on Car Loans for Self-Employed

Let’s understand the details of car loans for self-employed individuals.

Suppose you own a business firm, and your firm’s total earnings stand at Rs. 12 lakh. You have purchased a car by obtaining a car loan, and the yearly interest on the car loan amounts to Rs. 50,000. Now, let’s consider the two scenarios and see the tax liability.

In the first instance, you do not include the car loan in tax calculations. As a result, your total tax liability becomes 20% of 12 lakh, which amounts to Rs. 2.4 lakhs.

Now, let’s look closely at the second scenario in which you consider the car loan in the tax calculations.

As you are using the car for commercial purposes, you can reduce your taxable income by the interest amount, i.e., Rs. 50,000, and your net taxable income stands at Rs. 11.50 lakhs. The tax liability amounts to 15% of 11.50 lakhs, which is Rs. 1.72 lakhs.

Hence, your tax liability is reduced by a whopping Rs. 68,000. Additionally, you can also use the depreciation value of your car as well as fuel and maintenance expenses as tax deduction items.

How to Easily Calculate Car Loan EMI?

The easiest way to calculate your car loan EMI is by using a car loan EMI calculator.

A car loan calculator is an online tool that allows car owners to get the exact EMIs they would pay for a particular car loan. As a car owner, you only need to enter your loan amount, loan tenure, and interest rate. Once submitted, the online EMI calculator gives the expected monthly EMIs.

Things to Remember for Car Loan Tax Benefits for Self-Employed  

Here are some things that you need to remember and follow if you wish to claim tax benefits on your car loan for commercial use: 

  • The concerned Income Tax Assessing Officer can determine whether the car loan is for commercial, personal or luxury use. 
  • The car’s registration should be in the name of the business or business owner if it is a proprietary firm.

How Can I Claim Tax Exemption on a Car Loan?

You can claim tax exemptions only if you are self-employed by the following means: 

  • The first requirement is that you have a functioning business and show that you are using the car for commercial purposes, not personal use.
  • The tax exemption only applies to the yearly interest you pay banks, not the principal amount. Hence, when computing, you must segregate the principal and interest amount and deduct only the interest amount from the tax liability.
  • Cars are fixed assets for your business, and every fixed asset depreciates annually. You can also use the depreciation aspect of your car to claim further tax benefits.

Also read: How To Save Money On Your Two-Wheeler Insurance?

Why is a Car Insurance Necessary for Added Benefits?

In today’s world, car insurance has become quite necessary due to the higher risks of accidents, collisions, and theft. Car insurance is a safety shield for owners in light of various uncertainties and potential risks.

Lenders often require comprehensive car insurance with your loan. That’s because comprehensive car insurance can help safeguard both your and your lender’s investments. This step is essential to protecting your financial interests and complying with loan terms.

The IT Department offers significant tax relaxation for the self-employed and business owners on interest paid on car loans. The car loan tax benefits for self-employed individuals will lead to huge savings, which they can use to reinvest in their business or save for future use.

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