In India the past few years have seen a rapid growth in consumerism. The access to and easier availability of more funds has meant aggressive buying by people across the board. The once thought luxury of owning a car is no more just a dream. Any individual from any walk of life can now own a car. With the vast range of car models available, it is become much easier to own your dream car. And the newfound alliance between the car maker, the dealer and the financier and their ability to juggle the margins between themselves has added to this rosy scenario. Therefore, the potential buyer is able to get a better deal because of cross-subsidization between the three.

Lately there is an interesting trend emerging: cars are also being replaced quickly. There is a growing feeling that if you purchase a car through monthly installments you can get tax benefits for businessmen and self-employed professionals. However there is an interesting fact for purchasing a car for self - employed professionals & businessmen Timing of this purchase matters. Depreciation can be claimed by them .Buying between October and March will entitle them to a 10 per cent depreciation benefit, but if the purchase is made before 30th September, the entitlement of claim increases to 20 per cent. Depreciation is calculated on the ex-showroom price and not on the on-road price; thus, insurance and road tax charges won't be taken into account. If you are thinking of making a purchase at the end of the financial year, hold on. Purchase it in the following year to claim higher depreciation benefit

The deduction, however, will be restricted to the proportion in which the car is used for official purposes. In other words, if the car is used to the extent of, say, 75 per cent for business purposes, 75 per cent of the interest on the car loan and 75 per cent of the depreciation allowable under the Income-Tax Act read with the I-T rules can be allowed as a deduction.

The next question in mind would be, how does one avail of this benefit. ? Can I get tax exemption on interest paid on car loans?

Yes, nowadays with the various finance options available you can purchase your car with a loan as well as avail the benefit of tax deduction.

The three options available for you for car financing are Loans, Hire purchase and Lease. Leasing can be further bifurcated into financial and operational lease. The above options have their own merits and demerits with respect to each individual borrower.

Option 1: Loan - When a borrower goes in for a loan option, while the ownership is vested with the borrower, the car is hypothecated in favour of the financier as security. Business entities and self-employed professional can avail the benefit of tax deduction on interest paid and depreciation on the car. However no deduction can be claimed on principal repayment. Also most states levy a stamp duty on the loan agreement.

Option 2: Hire Purchase - In this option, the financier purchases the car on behalf of the borrower and in turn sells it to the borrower. The legal ownership belongs to the financier till the borrower pays the last installment. Business entities and self-employed professional can avail the benefit of tax deduction on interest paid and depreciation on the car, while no deductions is available for principal repayment. Many State Governments levy sales tax, turn tax, value-added tax and stamp duty on hire purchase transactions.

Option 3: Financial Lease - In the case of lease the ownership vests with the financier. The borrower pays rentals on the amount financed, which will cover both principal and interest. In this option, only the financier can claim the depreciation on the car. However, the borrower can claim deduction on the full amount of rentals paid by him in any accounting year. At the end of the lease, the car is usually, though not compulsorily, transferred to the lessee at the value determined in advance

Now since you are armed with the relevant information, go ahead and get that dream car of yours. Safe driving!!