The Union Budget 2019 brought good news if you were planning to purchase an electric bike or car on loan. A new section 80EEB was introduced to provide deduction up to Rs 1.5 lacs on the interest paid on electric vehicle loans.
Car loans are medium value and short (or medium) term loans. Given this peculiarity about car loans, how much tax savings does this section really provide? In this post, let’s answer this question.
Tax Benefit under Section 80EEB
If you have taken a loan to purchase an electric vehicle, you can take tax deduction up to Rs 1.5 lacs on the interest paid on such a loan. Your loan must satisfy the following conditions.
- The loan must be sanctioned between April 1, 2019 and March 31, 2023. (You have a lot of time to make the choice. There is no need to rush)
- The loan must be taken from a financial institution
If your loan meets the above two conditions, then the tax benefit will continue as long as your loan is alive (and not just till FY2023). The loans for both electric cars and bikes are available.
By the way, the Finance Act has the definition for electric vehicles too.
“electric vehicle” means a vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by traction battery installed in the vehicle and has such electric regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical energy;
How much tax benefit will you really get?
A lot depends on the quantum of the loan (value of the car) and your tax bracket. There may not be too many choices in the electric vehicle space now. However, you can expect a greater push in this segment given these tax benefits, consumer preference along with a reduction in GST rates from 12% to 5% on the electric vehicles.
Car loans have another important feature.
- Unlike home loans, car loans are lower value loans. Most car loans would be in the range of Rs. 3-15 lacs. The loan quantum can be higher or lower. However, you wouldn’t expect car prices to be in the same range as house prices.
- Unlike home loans, car loans are relatively shorter term. While home loans can have repayment tenure of up to 30 years, car loans are typically up to 5 years.
Let’s assume you take a car loan of Rs 15 lacs (cost of the car must be about 18-20 lacs). The rate of interest is 10% p.a. and the loan tenure is 5 years. Now, 18-20 lacs car is a big purchase for most of us. Therefore, I have used the number to demonstrate the tax benefits. EMI for this loan will be Rs 31,607. Here is how much you will pay in interest over the next 5 years.
You can see even, for a Rs 15 lacs car loan, you don’t touch Rs 1.5 lacs in interest paid in the first year. Also, notice how sharply the interest amount falls in the subsequent years. Contrast this with the home loan of Rs 15 lacs (interest rate of 10% and tenure of 20 years). EMI for such a home loan will be Rs 14,475.
In short to medium term loans, the principal outstanding falls very fast. Notice the difference in EMIs (Rs 31,706 in 5-year car loan vs Rs 14,475 in 20-year home loan). Remember, the rate of interest is the same. Therefore, interest paid goes down quite fast too. While car loan gets over in 5 years, under the home loan, you pay only 10.2% of the principal over 5 years.
Even for big loan amounts, it will be difficult to touch Rs 1.5 lacs of interest in car loan every year. Not saying that you should purchase an expensive electric car to get tax benefits.
Expectedly, the tax savings are higher for the higher loan amount and tax brackets. Note that these are cumulative tax savings over 5 years (the loan tenure).
You can see that the tax savings, though not insignificant, are not very substantial. The initial impression was that there would be huge tax savings, but that does not seem to be the case. I do not deny that this assessment is subjective.
Moreover, when you are purchasing a car on loan, there may be lesser inclination to negotiate hard on the car prices or the overall deal from the dealer. Let’s say you plan to take a Rs 5 lac loan on the 6 lac car. The net tax saving for a buyer in 20% tax bracket is Rs 27,482. In many cases, you can save this much by negotiating your car deal well. Therefore, do not ignore this aspect. Negotiate the car deal and the loan deal separately.
Remember, you still pay interest on the loan. The tax benefit only brings down the effective cost of your loan.
What about an electric bike?
Though the tax benefit is extended to electric bikes too, the value of bike will be lower and loan tenure shorter. Let’s say you take Rs 1 lac loan for bike purchase for 3 years. Rate of interest is 10%. EMI shall be Rs 3,226.
Over 3 years, you will pay Rs 16,602 in interest. If you are in 30% tax bracket, you will save Rs 4,848 in taxes. If you are in 5% bracket, you will save Rs 808 in taxes over 3 years. Sometimes, you can save more by negotiating hard.
I am not saying that Section 80EEB does not provide much relief, but it certainly falls short of the initial impression. And this has more to do with the nature of car loans. It is a benefit, nonetheless. It is a good initiative too by the Government to promote electric vehicles.
Do understand buyers may prefer electric vehicles not just for tax savings. There may be way more important reasons behind such a preference. You may want something that is more environment-friendly. There are a few financial reasons too i.e. running and maintenance cost may be lower. Your choice will also depend on your usage and how supportive your city infrastructure is for such vehicles.