A car can be a significant investment; for business owners, it can be an asset that aids in their business’s growth and operations. However, alongside the costs of buying a car, there’s also the potential for tax benefits, mainly if the vehicle is used for business purposes.
If you’re wondering how to claim tax benefits on a car loan and reduce your tax burden, this guide will walk you through the process and provide clear steps to maximise your deductions. Understanding the right way to claim these benefits can help ease the financial strain and make your vehicle purchase more cost-effective.
Who Gets Tax Cuts for Car Loans?
In India, cars are often viewed as luxury items, which means individuals using them purely for personal enjoyment cannot claim tax deductions on car loans. However, there’s a significant benefit for business owners or self-employed individuals. If the car is used for business purposes, the interest on the car loan can be claimed as a business expense. This can help reduce your taxable income, resulting in lower tax liability.
How can you cut taxes with your car loan?
1. Claim all interest for work-only cars
You can deduct the full car loan interest from your taxes if your car is used exclusively for business purposes. To simplify the calculation, you can use an auto loan EMI calculator to determine the interest amount. At the end of the financial year, ensure you request a statement from your lender to document the interest paid for tax filing purposes accurately.
2. Claim Partial Interest for Mixed Use
If you use the car for both personal and business purposes, you can still benefit from tax deductions. Allocate the expenses based on the percentage of time the vehicle is used for business. For example, if the car is used 60% of the time for business and 40% for personal errands, you can claim 60% of the car loan interest and depreciation as a business expense.
What Do You Need to Do to Claim These Benefits?
1. Use Your Car for Real Business Purposes
This one’s non-negotiable. You can’t claim deductions if your car isn’t being used for business.
2. Register the Car in Your Name or the Business’s Name
Ensure the car is purchased and registered under your or your company’s name (as a business owner). This is crucial for claiming tax benefits.
3. Keep Proof Handy
Request an interest certificate from your lender. This document will prove the interest you’ve paid on your car loan. Keep it accessible, as you may need to provide it if the tax authorities require verification.
4. Maintain Detailed Records of Business Use
Keep track of the percentage of time your car is used for business purposes. Detailed records, such as a logbook or mileage tracker, will help you accurately calculate the deductible expenses.
5. Ensure Proper Documentation for Business Expenses
Along with the interest certificate, you should maintain documentation for any other car-related expenses, such as fuel, maintenance, and insurance, that you claim as business costs.
Conclusion:
In addition to serving as a means of transportation, a car can provide significant tax benefits for businesses. You can effectively reduce your taxable income by utilising the vehicle for business purposes and maintaining proper documentation.
This could be a valuable opportunity if you are looking for ways to maximise savings. However, ensuring that all information is accurate and thoroughly documented is essential. Adhering to these practices will help you take full advantage of the tax benefits available and ensure compliance with tax regulations.
Laila Azzahra is a professional writer and blogger that loves to write about technology, business, entertainment, science, and health.