Published on Mar 31, 2020Updated on Sept 29, 2023
Mortgaging property, be it commercial or residential has been an age-old tradition when there is a need for significant funds.
It is something most of us may have considered at some point in our lives when there has been a major financial crunch. As opposed to selling off the property all together where there is a loss of ownership, putting it up as collateral with a financial institution is definitely a better proposition.
Loan against property eligibility is clear and simple. Such a loan is achieved by borrowing funds after pledging residential or commercial properties as collateral. Loan against property is a secured loan. This allows lenders to offer competitive loans against property interest rates as opposed to unsecured loans.
Loan against property is a long-term commitment, typically tenures going up to 20 years. The biggest benefit of a loan against property provides is that it funds for multiple needs.
There is another very important factor to consider when one is taking this loan. In addition to availing the loan, individuals including both salaried and self-employed professionals can also claim tax benefits on loan against property.
Let’s take a look at some of the key Loan against property tax benefits:
Please note that this particular section of the Income Tax act only refers to expenses, and not income as widely misinterpreted by many people. Thus, if you have some expenditures towards your business operations which need not be capital expenditures or personal expenses, you can enter this amount in your income / loss statement.
When it comes to loan against property, please understand that this loan is not tax deductible – irrespective of whether it was taken for business or personal reasons. When you take a home loan, since you are investing in property in exchange for money, the loan can be exempted from taxes. Same goes when it comes to purchase of commercial assets (up to some extent) by business entities. On the other hand, a loan against property means that you have borrowed cash by pledging your property, and hence this amount does not provide any tax benefits.
This particular tax benefit is for salaried individuals. If the borrowed funds are used for purchasing another residential property, then one can claim tax benefit up to Rs. 2 lakh. However, one needs to establish a link between the loan amount and the end-use, in accordance with Section 24(B).
One can claim the tax deductions on the interest paid and not on the principle that is repaid. However, this deduction cannot be claimed if the funds are used to transform the mortgaged property. If the borrowed funds are used for spending on marriage, education or holidays, then one cannot claim tax benefit.
Section 80C is the most commonly used in home loans. However, section 80C is not applicable on loan against property. One can claim the deduction under section 24 (B) on the interest part of the payment, even if one has missed the actual payment. Section 24 states that the deduction is applicable to the interest "paid or payable". However, one needs to keep the documents safely for proof.
One can claim the deduction only if the loan amount is used for the purchase of another property, repair, renewals, etc. of the house.
Existing home loan borrowers can also apply for something known as ‘top-up loans’ on lower interest rates in comparison to personal loans. The top-up loan can be used for any purpose as long as it falls within the guidelines stated by the lending financial institution.
Tax benefits on top-up loans can be claimed provided you have all the relevant receipts and documents to establish that the top-up loan taken has been used for acquisition/ construction/repair/renovation of a residential property.
The maximum deduction available is Rs. 30,000 unlike the Rs. 2 lakh deduction available on interest payments. However, this deduction can be claimed only if the property is self-occupied. In case the property has been let-out at the time of undertaking repairs and renovations, there is no limitation on the deduction that can be claimed.
That said, the maximum set-off that one can claim in any financial year is still capped at Rs. 2 lakhs against other heads of income. If the interest amount has crossed Rs. 2 lakhs in the given financial year, then the individual can carry it forward by up to 8 years.
The tax benefits on loan against property even in the case of top-up loans primarily depend on the principal repayment in correlation to the usage of the funds. If one has used the funds to develop or buy a new property, then the tax deduction claimed will automatically fall under section 80C and 24 (b), respectively. But, if the funds have been used for repairs, renovation or alteration of the property then one cannot claim any deduction on the principal repayment.
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