Leverage Tax Benefits with a Property Loan

Loans against property have been popular among the masses for many decades. It is considered one of the best options for availing credit in hours of urgency. People have been applying for loans against both commercial and residential properties. After all, it is better to take a loan than sell off one’s home and lose its ownership for good.

Besides the many benefits of these loans, one can avail tax benefits on property loans. In the following sections, readers will understand the basics of loans against property (LAP) and their tax benefits.

What is a loan against property?

A loan against property is a type of credit facility offered by banks or NBFCs which can be availed by individual or business entities against the mortgage of a commercial property or a residential property. It is a loan secured by collateral where the risk is comparatively on the lower side.

However, the amount of loan that one can secure depends on the current market value of the mortgaged property. Lending institutions typically sanction a loan equivalent to 60-75% of the total market value of a mortgaged property as per the lender’s appraisal. Lenders offer the highest LTV (loan-to-value) ratio for newly constructed properties in prime locations.

It is important to note that there are several loans against property eligibility criteria besides the LTV ratio based on which a loan is sanctioned.

Condition for tax benefits on a loan against property

Both salaried and self-employed individuals can avail a loan against property and its tax benefits. However, the provision for these tax benefits depends primarily on how the loan amount is put to use.

A borrower availing a loan against property is eligible for tax deductions under two circumstances.

• If there is a purchase or construction of a new house by a salaried borrower.

• In case the loan against property is used for business purposes.

It is important to note that these tax deductions do not apply to the principal amount and only to the interest paid for a loan against property.

Tax benefits of a loan against property

Listed below are the sections of the Income Tax Act which allows a borrower to avail tax benefits of property loans on the amount of interest paid.

Deduction under Section 24(B)

Any salaried individual is eligible to avail this deduction under this section provided that they use the loan against property to purchase a new residential house. In such a scenario, the borrower is eligible for a tax deduction of up to Rs.2 lakh on interest payments.

An individual using an LAP for modification of the mortgaged property is not eligible to claim these tax benefits. If they use this loan to finance education, marriage or holidays, this deduction provision will also not be applicable.

Deduction under Section 37(1)

Any self-employed individual is eligible to avail tax deductions for LAP under this section. A borrower can claim the tax benefits on the processing fees, interest charges, documentation fees and all other expenses that qualify as business expenditures. 

Other tax benefit scenarios

No tax exemption facility is available in case an LAP is used for various purposes like education, travel, marriage or medical expenses.

No tax deductions are allowed for a loan against property under Section 80C of the Income Tax Act. However, if there is an existing home loan, one can claim tax benefits under this section of the Income Tax Act.

Furthermore, there are several tax benefits on the top-up facility of home loans. One can claim them by mortgaging a residential or commercial property. A top-up loan is an extra loan that many lenders offer to their existing home loan customers if they need additional funds. 

Here are some of the additional tax benefits of an LAP:

• If a borrower utilises a loan against property for purchasing, repairing, constructing or renovating a residential house, they are eligible to claim tax deductions on top-up loans under Section 80C and Section 24 (B).

• In a typical loan against property, a deduction of Rs.2 lakh can be availed by an individual assessee. But for top-up loans, the maximum limit of deductions is only Rs.30,000. Furthermore, one can only claim this benefit only if the house property is self-occupied. It is to be noted that one’s total deductions should not exceed Rs.2 lakh.

• If a house is let out during the time of renovation, the borrower (applicant) is eligible to claim a deduction for any amount, within the upper limit of Rs.2 lakh.

• Suppose the interest of a loan against property and a top-up loan exceeds Rs.2 lakh in a financial year cumulatively. In such a scenario, the amount is allowed to be carried forward for a maximum period of 8 years for claiming tax deductions.

Nowadays, many lending institutions provide pre-approved offers to credit-worthy customers. These offers are usually based on an individual’s credit score. Pre-approved offers are available on personal loans, home loans, loans against property and more. One can directly check his/her eligibility for such offers on the lender’s website.

A loan against property is indeed one of the most convenient and feasible ways to avail credit in hours of need. One can get this loan on a residential, commercial property or even a co-owned property. It is one of the best possible ways to accumulate funds without losing ownership of a property. Additionally, one can avail tax benefits on property loans.

There are some additional benefits of LAPs like quick processing time, large sanction amount, lower rates of interest and simple documentation procedure.