Tax Exemption on Car Loan Interest

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Loans and tax deductions go hand by hand. Loans are a liability for any consumer but at the same time, some tax rebates are available for some loans. These range from education loans to car loans to home loans and personal loans. Today, we discuss about tax exemption available for car loan interest paid by you.

Tax Exemption for Car or Auto Loans
As cars come under luxury items and as such no tax benefits are available to the consumers who have purchased car or auto on loan. Thus, car loans availed by individual consumers do not get any tax benefit. However for commercial car, vehicle and equipment loans, tax deduction is available.

Tax Exemption for Cars used for Business
When you take out loan on a vehicle for use in your business, the interest you pay is considered as a business expense. This implies that you can claim tax deduction for the proportion of business use of the vehicle. When the vehicle is used only for business, the calculation is very easy.
For example, if the vehicle is used partly for business and partly for personal use, the interest is deducted as the percentage for the car used in your business. There are two methods to determine the proportion of business use of the vehicle.

car loan interest

Methods of Calculation for Business Use:

 Logbook
Logbook method lets you track your expenses for 12 weeks. You can record each journey including start and finish times, total kilometers travelled and business reason for the trip. The logbook also needs to consider the start and end date for log period, odometer reading and total kilometers driven. Then, you can calculate the business use percentage for the logbook period.
Actual Mileage
With this method, you can claim up to 5000 kilometer every year. You need to multiply the total number of kilometers you travel with standard rate of 66 cents per kilometer.
Some useful points:
  • To get tax deductions, the car must be used for legitimate business purposes.
  • The car must be registered in the name of business or business owner in case of proprietary firm or practising professional.
  • The Income Tax officer is given discrete power to veto the deduction.

Feel free to share your thoughts with us in the comments!

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