The tax-deductible interest refers to interest payments on certain loans that can be deducted from taxable income, leading to lower income tax liability. It benefits taxpayers by legally reducing the amount of income on which tax is calculated, thereby providing tax relief on expenses such as home loans and education loans.
Key Takeaways
- Tax-deductible interest reduces taxable income by allowing deductions on interest paid for loans like home and education.
- Under Section 80E, there's no upper limit on education loan interest deductions, claimable for up to 8 years.
- Home loan interest is deductible up to ₹2 lakh annually for self-occupied homes under Section 24(b), with no limit for rented properties.
- Unlike tax credits, tax deductions lower your taxable income, not the tax amount directly.
Tax Deductible Interest: An Overview
Tax deductible interest in India primarily arises under the Income Tax Act, 1961, allowing taxpayers to claim deductions on interest paid against loans taken for specific purposes like buying a house or funding education. These deductions incentivise borrowing for productive investment and education, easing financial burdens by reducing taxable income.
Student Loan Interest Tax Deduction in India
India offers a tax deduction on the interest paid on education loans under Section 80E of the Income Tax Act. This deduction is available for interest paid on loans taken for higher education for self, spouse, or children.
Unlike the home loan interest deduction, there is no upper monetary limit on the amount that can be claimed as a deduction under Section 80E. The deduction is available for a maximum of 8 consecutive years beginning from the year the loan repayment starts.
To claim this deduction, the loan must be taken from a financial institution or approved charitable institution. It applies only to interest payments and not to the principal repayment. This tax benefit helps reduce the effective cost of funding education through loans.
Home Loan Interest Tax Deduction in India
For homeowners, interest paid on home loans is deductible under Section 24(b). The current provisions for FY 2025-26 are:
- For a self-occupied property, the maximum deduction allowed on interest paid is ₹2,00,000 per annum.
- For a rented-out property, there is no upper limit on interest deduction; the entire interest amount can be deducted from the income from house property.
- If the house is under construction, the interest paid during the construction period can be claimed in five equal installments starting from the year the property is completed.
- As per the 2025 budget changes, taxpayers can declare up to two self-occupied properties for this benefit, easing tax planning for individuals with multiple homes.
What Is the Difference Between a Tax Credit and a Tax Deduction?
In India, a tax deduction reduces the taxable income, whereas a tax credit reduces the tax liability directly. For example, a deduction of ₹1,00,000 on home loan interest means taxable income decreases by ₹1,00,000, which lowers tax payable by the taxpayer's marginal tax rate (say 30%), effectively reducing tax by ₹30,000. On the other hand, a tax credit would cut the tax payable by ₹1,00,000 directly.
Currently, the Indian tax system predominantly features tax deductions like those under Sections 24(b) and 80E rather than direct tax credits.
Conclusion
Tax deductible interest on loans such as student loans and home mortgages provides significant savings by reducing taxable income. Up to ₹2,00,000 per annum can be claimed on home loan interest for self-occupied properties, and there is no limit on student loan interest deductions under Section 80E for up to 8 years.
