Purchasing a car is considered a major life investment, especially in India. Considering the prices of cars and the taxes applied on purchases, people think twice before buying one. It is natural to expect some type of coverage for your car from damages and loss. This coverage is provided when you buy car insurance
for your brand-new car.
Now you might wonder if you can avail of the tax deduction on the insurance premium payment just like how it is possible with medical insurance
For most users, the answer is a ‘No’. Deductions aren't available under any section of the Income tax act for the premiums paid toward motor insurance policies. However, if you are a business owner, the premiums paid for your car that is used for business purposes can be claimed as an expense in arriving at the profits of your business that are ultimately taxed in the eyes of the law.
So, although a deduction can be claimed, it is not as simple as you might imagine and here’s why.
Understanding tax deduction
Before we get to the tax deduction on your car insurance, let us understand first what tax deduction means. The exclusion of a certain value of your income from being taxed on the basis of your investments, can be considered a tax deduction. This helps you in saving tax on your income. Tax deductions can be availed on investments such as public provident funds (PPF), fixed deposits (FDs), and mutual funds among others.
Car insurance and Tax deduction
Another product with the benefit of tax deduction is medical insurance. The premium that you pay for health insurance coverage is deductible under Section 80D of the Income Tax Act
. So, you might wonder if the same kind of deduction can be availed for your car insurance premium payments. The answer is yes, you can. However, there is a caveat. Tax deduction on your vehicle insurance is applicable only if you are using the car for work/business.*
- If you have a car generally used for personal purposes, the premium paid for the policy is not eligible for a tax deduction.
- If the car you use is provided by your employer, it does not make it eligible for a tax deduction, as it is still used for personal purposes.
Conditions for tax deduction
Tax deduction on your car insurance can be claimed if either of the following conditions are met:
- If the car you are using is provided to you by your employer for commercial use, the tax deduction can be claimed. This is because the car is provided purely for commercial purposes. As mentioned earlier, personal usage does not make you eligible to claim a tax deduction on it.*
- If the car provided to you by your employer is being used for both business and personal usage, a tax deduction can be claimed.
Do note that the criteria involve the cubic capacity of the car. In addition, a paid driver is also required to claim the deduction. This benefit is applicable if you are self-employed and using the car for both purposes. *
How can the tax deduction be claimed?
To claim a tax deduction on your vehicle insurance
, follow these steps:
Get an audit done
If you have a business with a turnover of more than Rs.1 crore, get an audit done. This helps in maintaining a record of the expenses and revenue of your business, in addition to knowing where tax deductions can be claimed in the expenses.
File the paperwork
Submit the paperwork related to your insurance policy. This includes the policy document and the receipt of the premium payment to claim the deduction.
Get the refund
Once the papers have been submitted, the Income Tax department will verify the claim. If the criteria are met, the refund would be initiated. The refund amount is up to the discretion of the authorities.
Is the claim amount also tax deductible?
Take this example: You are going to your office in your car. You are stuck in traffic and during this chaos, your car is bumped into by another car from behind. You file a claim with your insurer for compensation. As you have the zero depreciation cover
in your car insurance, the depreciated value of your car is not considered. This ensures you get the maximum compensation for the damages. And while you might get worried about tax being applied to the compensation amount, it is not. *
The compensation amount which is given to you by your insurer is for the loss that is caused. When your car gets partially or totally damaged, you are not making a profit as the cost you must bear is a financial loss for you. Hence, the compensation amount cannot be considered as a means of profit.
Is the insurance necessary?
Whether it is for personal usage or commercial purposes, the car you purchase is a hefty investment that requires constant upkeep. If your car gets damaged, getting it repaired is costly. It can be painful if the car is stolen or damaged. To be properly compensated for this, car insurance is necessary. You are also required under the Motor Insurance Act of 1989 to own a basic insurance policy, i.e., third-party insurance. *
*Standard T&C apply
While you may not be able to claim the deduction on the insurance for your private car, you can still enjoy the benefits of the insurance you own. If you do not own one, you must buy one as soon as possible. Use the car insurance calculator
to get a reasonable quote for the policy based on your requirements.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.