5 MinsSep 16, 2022
Dr. Vishesh Parikh is an orthodontist. He has thriving practices across three cities – Mumbai, Pune and Nashik. Since Vishesh loves driving, he recently bought a premium SUV. His idea was to drive down to his clinics in Pune and Nashik twice
a week to meet with his patients in those two cities.
Proud of his latest acquisition, he was showing off the car to his chartered accountant friend. When Dr. Vishesh mentioned his plan, the friend said that it was a smart idea as he would be able to enjoy tax benefits on his car loan.
When the good dentist expressed his surprise at the concept, his friend explained the rules.
Benefits available to self-employed professionals and business owners
According to the income tax rules, if self-employed professionals like doctors, lawyers, CAs, architects, or business owners take a car loan, they can
enjoy tax benefits, provided the vehicle is used for business purposes.
The law gives tax officers complete discretion in determining whether the vehicle is, in fact, being used for business purposes or not. If the officer decides that the automobile is being used for personal purposes, he can refuse to allow the
tax write-offs.
Tax benefits only on the interest paid
For a vehicle bought for business or professional purposes, the interest in the car loan is deductible from the owner’s income.
Dr. Vishesh has taken a Rs. 25 lakh loan for five years at an interest rate of 9%. His monthly EMI is about Rs. 51,800. His CA friend pointed out to Vishesh that for the first two years, his interest on the car loan would amount to approximately
Rs. 2.77 lakh. After that, the interest component is likely to taper down.
Vishesh can get a complete tax write-off on this interest amount. The key to availing these benefits is that the car should be registered in the self-employed professional or business owner’s name, and the EMI (Equated Monthly Instalment)
should be paid from their account.
For directors of private limited companies or partners in LLCs (Limited Liability Companies), the vehicle should be registered in the business’s name to be eligible for benefits.
An important point to remember is that the tax benefit is available only on the interest applicable for the actual cost of the car, not its “on-road” value, which typically includes registration fees and insurance, which are also sometimes
funded via the car loan.
[Also Read: Apply for an instant car loan online anywhere, anytime]
Depreciation
Another tax benefit is available if the car is used for business purposes – depreciation. According to accounting principles, an automobile is a capital asset that depreciates – reduces in value.
The tax laws allow for depreciation of 15% if the vehicle is purchased before September 30th of the year. If purchased after that, a depreciation of 7.5% is allowed for the first year.
After the first year, the car owner can continue to claim depreciation of 15% each year. Vishesh’s CA friend pointed out that since the on-road cost of his vehicle was Rs. 25 lakh and he had purchased it in April of that year, he can claim
15% of the value of the car, i.e. Rs. 3.75 lakh as depreciation. This means that this amount will be deducted from his taxable income.
The CA said that Vishesh should get tax benefits amounting to Rs. 5.83 lakh (interest and depreciation)
on his car loan in the first year itself. Pretty neat!
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