Car loan tax benefits: Who can claim deductions and how it works

Buying a car is a major financial and aspirational milestone for many Indians. While home loans offer tax deductions for both personal and business use, car loan tax benefits in India are far more limited and are available mainly when the vehicle is used for business purposes.

Here is a look at who can claim tax benefits on a car loan and how the deductions work.

Who can claim tax benefits?

In India, tax deductions on car loans are generally available only to:

• Self-employed individuals

• Business owners

• Professionals using the vehicle for work purposes

The vehicle must be treated as a business asset and the loan-related expenses should be reported as business expenses in Income Tax Return (ITR) filings.

For most salaried employees, tax benefits on a car loan are not available unless they can clearly establish that the vehicle is being used for professional or business purposes.

Importantly, these deductions can be claimed under both the old and the new tax regimes.

Ways to claim deductions

Deduction on loan interest

The interest paid on the car loan can be claimed as a business expense. To avail of this benefit:

• The car loan details must be included in ITR filings

• The interest component should be shown as a business expense

• Borrowers should obtain an interest certificate from the lending bank or financial institution

Only the interest portion qualifies for deduction, not the principal repayment.

Depreciation benefit

Since the vehicle is treated as a business asset, taxpayers can also claim depreciation on the car.

The depreciation amount depends on:

• The type of vehicle

• Applicable depreciation rates under income tax rules

This allows business owners and self-employed professionals to reduce taxable income over time.

Fuel and maintenance expenses

Expenses related to:

• Fuel

• Repairs

• Insurance

• Maintenance

can also be claimed as business expenses if the vehicle is used for official purposes.

When used for personal purpose

If the vehicle is used partly for personal use and partly for business, only the business-use portion can be claimed for tax deductions.

For example:

• If the car usage ratio is 60 percent for business and 40 percent for personal purposes, only 60 percent of the eligible expenses can be claimed.

Tax experts advise maintaining proper records of:

• Business travel

• Fuel bills

• Maintenance expenses

• Loan repayment documents

to support claims during tax assessment.

Tax benefits for electric vehicles

The government had earlier introduced a special tax benefit for electric vehicle (EV) buyers under Section 80EEB of the Income Tax Act to encourage EV adoption.

Under this provision:

• Taxpayers could claim deductions of up to ₹1.5 lakh on interest paid on EV loans

• The benefit applied to loans sanctioned between April 1, 2019 and March 31, 2023

However, no fresh extension or reinstatement of the scheme has been announced so far.

The deduction was available only to individual taxpayers, including salaried employees.

The following entities were not eligible:

• Companies

• Partnership firms

• Hindu Undivided Families (HUFs)

With the scheme no longer available for new loans, buyers of electric vehicles currently do not enjoy any separate income tax deduction on fresh EV loans.

(By arrangement with livemint.com)