What Loans Are Tax Deductible in India? A Complete Guide for 2026

Many Indians take loans to achieve important life goals like buying a home, funding education, or growing a business. What most borrowers miss is that some of these loans can significantly reduce their tax burden if used correctly. Knowing what loans are tax deductible in India can help you save lakhs over the loan tenure. Under the Income Tax Act, 1961, specific sections allow deductions on interest and principal repayment, provided eligibility conditions are met. At Saarathi.ai, we have observed that borrowers who plan loans with tax benefits in mind often manage EMIs better and improve long-term financial stability. This guide explains all tax deductible loans in India for 2026, limits under each section, common mistakes, and how to choose the right loan using Saarathi.ai’s AI-powered comparison tools.

Home Loan Tax Benefits in India

Home loans offer the highest tax deductions among all loans, making them a powerful tax-saving tool.

Tax Deduction on Home Loan Interest

Under Section 24(b) of the Income Tax Act, interest paid on a home loan is deductible:

• Up to Rs 2 lakh per year for a self-occupied property

• No upper limit for a let-out property, subject to set-off rules

This benefit applies only after construction is completed. Pre-construction interest can be claimed in five equal installments.

Tax Deduction on Principal Repayment

Under Section 80C, principal repayment qualifies for deduction up to Rs 1.5 lakh per year. This limit is shared with other investments like EPF and ELSS.

Additional Home Loan Benefits

• Section 80EE: First-time homebuyers can claim an additional Rs 50,000 on interest

• Section 80EEA: Affordable housing buyers can claim up to Rs 1.5 lakh extra interest

At Saarathi.ai, we help borrowers compare home loan offers from 110+ banks and NBFCs and highlight eligible tax benefits upfront using the Saarathi Recommendation Engine.

Education Loan Tax Deduction

Education loans provide one of the most flexible tax benefits.

Section 80E Explained

• Deduction allowed on 100 percent of interest paid

• No upper limit on the deduction amount

• Benefit available for 8 consecutive years or until interest is fully paid

This applies to loans taken for higher education for self, spouse, children, or a legal ward, whether studied in India or abroad.

Unlike home loans, education loans do not offer principal repayment deduction. Still, the unlimited interest benefit makes them extremely tax-efficient.

Business Loan Tax Benefits

Business loans are also tax deductible, but the benefit depends on usage.

Interest Deduction for Business Loans

Interest paid on business loans is deductible under Section 36(1)(iii) or Section 37, provided:

• The loan is used strictly for business purposes

• Expenses are properly documented

Examples include:

• Working capital loans

• Machinery or equipment loans

• Loans for office expansion

There is no upper limit on interest deduction if the expense is legitimate. Principal repayment is not deductible.

At Saarathi.ai, self-employed professionals and MSMEs use our platform to compare business loan offers and track tax-relevant documents via the Saarathi Bazaar dashboard.

Loan Against Property Tax Benefits

A Loan Against Property (LAP) can also offer tax benefits depending on how the funds are used.

• If used for business purposes, interest is deductible like a business loan

• If used for home renovation or construction, interest may qualify under Section 24(b)

There is no blanket tax benefit for LAPs. Proper documentation of end-use is critical.

Personal Loans and Tax Deductions

Personal loans do not automatically qualify for tax benefits. However, usage matters.

When Personal Loans Are Tax Deductible

• Used for business: interest deductible as business expense

• Used for home renovation: interest may qualify under Section 24(b)

• Used to purchase assets that generate income: interest may be deductible against income

If used for travel, weddings, or consumption, no tax benefit applies.

Vehicle Loans and Tax Benefits

Car loans for personal use do not provide tax deductions. However:

• For self-employed individuals using the vehicle for business, interest and depreciation may be claimed proportionately

• Electric vehicle buyers can claim interest deduction up to Rs 1.5 lakh under Section 80EEB, subject to conditions

Quick Comparison Table: Tax Deductible Loans in India

Common Mistakes Borrowers Make

Many taxpayers lose deductions due to avoidable errors:

• Claiming benefits before possession of property

• Not maintaining proof of loan usage

• Confusing principal and interest deductions

• Missing out on additional sections like 80EEA

At Saarathi.ai, our AI expert helps borrowers understand eligibility in simple language and avoid costly tax mistakes.

How to Choose the Right Tax-Saving Loan

When selecting a loan, do not focus only on interest rates. Consider:

• Total tax savings over the loan tenure

• Eligibility under multiple sections

• Flexibility in repayment

• Transparency in lender charges

Using Saarathi.ai, you can:

• Compare personalized loan offers instantly

• Track applications and documents in Saarathi Bazaar

• Get AI-backed recommendations aligned with tax efficiency

FAQs: Loans and Tax Deductions in India

Are all loans tax deductible in India?
No. Only specific loans and specific uses qualify for tax deductions under the Income Tax Act.

Can I claim both principal and interest deduction on a home loan?
Yes. Principal under Section 80C and interest under Section 24(b), subject to limits.

Is personal loan interest tax deductible?
Only if the loan is used for business, asset creation, or income generation.

Can salaried individuals claim business loan tax benefits?
Only if they have business income and proper documentation.

Do joint home loans offer higher tax benefits?
Yes. Each co-borrower can claim deductions individually, subject to eligibility.

Conclusion

Understanding what loans are tax deductible in India can significantly reduce your tax outgo when planned correctly. The biggest benefits come from:

• Home loans with combined interest and principal deductions

• Education loans with unlimited interest benefit

• Business loans with full interest deduction

Instead of guessing, make informed decisions. Discover personalized, tax-efficient loan options on Saarathi.ai today and let our AI-powered platform guide you toward smarter borrowing and better savings.