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Car Insurance Tax Deduction Guide
Mar 30, 2023

Is Car Insurance Tax Deductible? Maximizing Savings with Our Guide

Insurance policies are a way to safeguard the unexpected financial losses that may occur. Be it for your life, your health, your travels, or even your car, you have an insurance plan for it. But when it comes to life and health insurance plans, the Income Tax Act allows certain deductions for the premiums paid. These are commonly known by many and used to save on taxes. However, it is subject to certain conditions that must be followed. But, what about the premiums that you pay for your car insurance policy? Is it deductible in your tax computation? In this article, we explore if car insurance is tax deductible, who is eligible to claim its deduction, and how to claim such a deduction.

Is Car Insurance Premium Tax Deductible?

The answer to “is car insurance tax deductible” is a ‘yes’, as well as a ‘no’. Depending on the purpose for which you use the car, you can claim the deduction of its premium. Here are two scenarios explaining how you can claim the deduction of your car insurance premiums.
  1. The car is exclusively used for personal purposes

If you are someone who uses your car exclusively for personal purposes, then no deduction of the premium can be claimed. This is mostly the case for salaried individuals that commute in their cars to work. Since travel allowances are paid by the employer, no further deduction can be claimed for its insurance premiums. This is true even when the employer provides you with a car.
  1. The car is used for business purposes

If you use the car for carrying out your business activities, you can claim the deduction of its premium. The deduction of its premium is not directly available under any section of the Income Tax Act. Instead, it is available by way of adding it to your business expenditures thereby lowering the overall profits on which your business ends up paying taxes. Thus, there is no direct way to claim the deduction of your car insurance premium. However, the above way can be exercised only by professionals and businessmen using their vehicles for business use. Depending on whether the vehicle is used entirely or partially for business, the deduction of the premium is either available fully or on a pro-rata basis. For more details on such bifurcation, you can reach out to your tax professional or a Chartered Accountant. **

What are the ways to claim the deduction of your car insurance premium?

  • To claim the deduction of a comprehensive or third-party car insurance policy, you need to maintain your books of accounts. Maintaining books of accounts ensures all the deductible expenses for your business can be reduced from the overall sales figures to arrive at a profit figure. **
  • Additionally, if your business has a turnover of over ₹1 crore, you need to get your accounts audited by a certified Chartered Accountant. **
  • Once your accounts are in place, the car insurance premium receipts can be claimed as a deductible expenditure lowering the overall profits on which tax is computed. **
  • Based on the tax deducted at source, you will be either refunded or required to pay additional tax.

Is the insurance claim amount also tax deductible?

Insurance plans work on the principle of indemnity. Hence, they are no means to make a profit, but to make good for the losses. As a policyholder, you are not making profits when you raise a claim. Therefore, the claim paid by the insurance company is not taxable. The insurer pays for the financial loss suffered by you. Let’s look at an example to understand this: Mr. Sanjay has a four-year-old car with ₹5 lakhs as its Insured Declared Value (IDV). A fire damaged his car beyond repair. A claim with the insurer resulted in a case of total loss and thus, the insurer paid ₹5 lakhs as compensation. Since the car was used by Mr. Sanjay for his business and the claim paid the entire IDV, he believed the same would be taxed. However, there is no tax implication of the pay-out of ₹5 lakhs.

Is it mandatory to have a car insurance policy?

Yes, motor insurance is mandatory for all vehicles registered in the country. To drive a vehicle legally in India, it is necessary that it has a valid registration certificate, PUC certificate and a valid motor insurance policy. Cars are no exception to this rule, and hence, all cars need to have a car insurance policy. Moreover, a car insurance policy is not a one-time process. It must also be renewed consistently over each period to keep the coverage active. *

To conclude

Car insurance premiums can be claimed as deductible expenses provided the car is used for business purposes. While there are various insurance plans to choose from, it can get confusing to decide which policy to select. That’s when you can make use of a car insurance calculator. This nifty tool comes in handy to compare the different policies not only based on their premiums, but also their features.   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. * Standard T&C Apply ** Tax benefits are subject to change in prevalent tax laws.

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