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Can Vehicle Insurance Be Tax Deductible?

Those who are aware of the benefits of having an insurance policy buy one for themselves and secure the things. Along with being a better investment option, insurance helps you manage your finances. You can also save money on tax deductions as per the Income Tax Act. This benefit can be availed in the case of certain insurance policies. Today, we are going to learn more about vehicle insurance and the tax benefits related to it. The following article explains how tax deductions are applicable in vehicle insurance.

Concept of Vehicle Insurance

Vehicle Insurance is also termed Auto Insurance or Motor Insurance. It is a contract between the insured person and the insurance company. The company protects an insured person against financial loss in case of theft or accident. The insured person pays a premium in exchange for the losses covered by the insurance company. Vehicle insurance aims to provide financial protection against theft and damage or physical injury caused by traffic collisions. In simple words, it is insurance for the vehicles on the road, mainly motorcycles, cars, and trucks.

The insurance company pays for your losses, if any, in exchange for the premium. Standard policies have-defined terms and conditions which you need to follow. Customized policies offer individual pricing and customization of the coverage as per your needs and budget. You need to renew your vehicle insurance policies after every 12 months. The insurance company notifies you before renewal and payment of the premium. You can claim damages due to any issue covered under your policy during the period of cover. The insurance company allows No-Claim Bonus if you don't claim during the policy period.

Importance of Having Vehicle Insurance

Following are the reasons that clarify why you must consider opting for vehicle insurance-

1. It is mandatory by law - Driving a vehicle without a valid insurance policy is against the law. You have to pay fines when caught driving without vehicle insurance.

2. It covers third-party losses - The most basic vehicle insurance policy provides coverage against third-party losses.

3. It covers own damage - With a comprehensive vehicle insurance policy, you can claim for damages to your vehicle. The reason can be any fire, an accident, natural calamity, or artificial calamity. This type of vehicle insurance policy also provides cover against theft.

Tax Deduction Benefit for Vehicle Insurance

With some pre-defined conditions, vehicle insurance deduction under income tax is allowed. Here we are providing a list of when you can or cannot claim a tax benefit.

1. Vehicle used for personal reasons

Vehicle insurance is not a great choice for tax savings for those who don't use vehicles for business purposes. When you use a vehicle for personal requirements, you cannot avail of the vehicle insurance premium tax benefits. This is true even if the employer provides you with the vehicle. If it is not used for business, the insurance premium paid would not be treated as an expense.

2. Vehicle used for business purposes

As per the following conditions, tax benefits are allowed on things related to a vehicle used for business purposes.

Only business use– You can get tax benefits for the expenses related to a vehicle provided by the employer for business purposes. You must keep the bills, driving records, kilometers covered, date of use, etc., ready for tax calculations. You must have a certificate from the employer confirming the vehicle is used for business purposes only. The premium paid for vehicle insurance is treated as an expense since it is used for business purposes. The amount of vehicle insurance premium to be claimed as a business expense has no maximum limit. The only criterion is that the vehicle must be used for business.

Business and personal use – In this case, the vehicle is owned by an employer. It is partially used for business and personal reasons. In addition to the presence of a paid driver, the tax exemption is calculated on the vehicle's cubic capacity. In this case, the vehicle is used for business and personal purposes. Hence, the tax deduction is allowed for premium in the proportion of the vehicle used for business purposes.

Tax Deduction in Case of Self-employed Persons

As mentioned earlier, the vehicle insurance premium is tax-deductible only when used for business purposes. A vehicle used for commercial purposes has a higher risk of accidents and damage than that used for personal needs. Hence commercial/business vehicles pay a slightly higher insurance premium. Since the vehicle is still being used for commercial purposes in the case of self-employed people, insurance can be tax-deductible. Thus it is a benefit given to business owners to take higher risks by using the vehicle for business-related transportation.

Tax Deduction in Case of Vehicle Insurance Claims

Vehicle insurance works on the principle of indemnity. This means the insurer bears the loss on behalf of the insured. The insured person is not making a profit out of the claim amount. On the contrary, he is suffering a loss. Irrespective of the claim being a major or a minor, the claim amount is non-taxable.

Go through the following example for a better understanding of the concept.

Suppose Mr. XYZ owns a 3-year-old Maruti Suzuki Swift car. The current market price of this car is around. 5 lakhs. Unfortunately, the car got stolen. As the police could not find the vehicle, they issued a non-traceable report. Finally, Mr. XYZ raised a theft claim. He received a claim amount of Rs. 5 lakhs. Since this was the compensation of loss for the car owner, tax deductions were not applicable on this amount.

Process of Getting Tax Exemption on Vehicle Insurance Premium

You can apply for a refund on vehicle insurance premiums by filing tax returns. Nowadays, you can easily complete the tax filing process online. Follow the below-mentioned basic steps to avail of tax exemption.

Step 1: Tax audit

You must get an audit report for your accounts from a chartered accountant if your business turnover exceeds Rs. 1 crore.

Step 2: Tax filing

You can take help from a professional to complete the tax filing process. You can either submit an invoice of the premium paid or attach the vehicle insurance policy with other documents for tax exemption.

Step 3: Refund

You will receive the applicable refund after the verification of documents by the Income Tax department.

Documents Required for Tax Exemption

Here we are giving you a list of documents you must submit to get a tax exemption. 

  • Original invoice of the vehicle
  • Receipt of vehicle insurance premium
  • Vehicle registration fee 
  • Bills of fuel cost
  • Documents of maintenance and servicing

Thus, you must maintain the records properly to submit them when availing of tax exemption.

Conclusion

Now we have understood the above aspects of vehicle insurance and tax deduction. We can say that vehicle insurance can be tax-deductible only when the vehicle is used for business purposes. The insurance premium for the vehicles used for personal reasons cannot be tax-deductible. If you are using a vehicle only for your business, you can avail tax deduction benefit.

 

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