Budget 2026: Will car loan interest get tax relief as govt pushes new tax regime?

As the Union Budget 2026 approaches, a familiar question is back in focus: should taxpayers get a deduction on interest paid on car loans, or will the government continue to steer people towards the deductions-free new tax regime? With rising vehicle costs and tighter household budgets, the issue is gaining traction among middle-class buyers and tax professionals alike.

Under current income-tax rules, there is no specific deduction for interest on auto loans taken for personal use — a sharp contrast to the tax benefits available on home loan interest. The only notable exception in recent years has been electric vehicles.

EVs vs petrol cars

To encourage green mobility, the government introduced Section 80EEB, allowing individuals to claim a deduction of up to Rs 1.5 lakh on interest paid on loans for electric vehicles. However, this benefit applied only to loans taken between April 1, 2019, and March 31, 2023, and has since lapsed.

CA Akshay Jain, Direct Tax Partner at NPV & Associates LLP, says this underlines the government’s targeted approach to tax incentives. "Under the existing provisions of the Income Tax Act, there is no specific deduction available for interest paid on auto loans for vehicles used for personal purposes, unlike the deduction for interest on home loans. The government had provided a deduction under Section 80EEB of up to Rs 1.5 lakh on interest paid on loans for electric vehicles, purely to promote EV adoption,” he said.

Jain added that business entities still enjoy tax relief when vehicles are used for professional purposes. “Interest on auto loans can be claimed as a deductible business expense if the vehicle is genuinely used for business. However, under the new tax regime, most deductions are forgone in exchange for lower slab rates. Given the government’s push towards the New Tax Regime, it appears more likely that incentives will remain targeted, such as for EVs and green mobility, rather than broad interest deductions for all auto loans.”

New tax regime means no concessions

With the government steadily nudging taxpayers towards the new tax regime, expectations of fresh deductions remain muted. The new regime trades exemptions for lower rates and simpler compliance, making it structurally difficult to add multiple tax breaks.

Yet, some professionals believe the government may need to sweeten the deal. Anita Basrur, Partner at Sudit K. Parekh & Co. LLP, says, “It is evident that the government wants to phase out the old regime and make the new regime the default choice. But to make it truly attractive, a few targeted deductions under the new regime could help. A deduction for car loan interest would be a welcome incentive, especially since there is currently no tax benefit for personal vehicle buyers.”

Where car loans do get tax benefits

While salaried individuals buying cars for personal use get no tax relief, the story is different for business owners and self-employed professionals.

If a vehicle is used for business purposes, the interest on the car loan is allowed as a deductible expense. In addition, the car is treated as a depreciating asset, with depreciation typically allowed at 15% a year. Running costs such as fuel, servicing and insurance can also be claimed in proportion to business use.

For instance, if a car is used 60% for business and 40% for personal needs, only 60% of the interest, depreciation and running expenses can be deducted. However, tax authorities require clear documentation — loan statements, interest certificates, maintenance bills and proof of business use — and can reject claims if they believe the vehicle is not genuinely used for work.

What Budget 2026 could decide

The debate over car loan tax relief highlights a broader policy crossroads. On one hand, offering a deduction on auto-loan interest could provide direct relief to middle-class taxpayers grappling with high EMIs. On the other, it could complicate the government’s strategy of pushing a clean, concession-free tax regime.

For now, all signs suggest that any future tax incentives will remain selective and policy-driven, favouring segments such as electric mobility rather than extending blanket benefits to all vehicle buyers.