How To Get Tax Benefits On Loan Against Property

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:

Tax Benefit under Section 37 (1):

If your loan is being used for business purposes, then the individual can rightfully claim a tax exemption from a loan against property under Section 37(1) of the Income Tax Act. Tax benefits can be claimed against interest that is paid and associated fees and charges that are incurred. The tax deduction can be filed under the category of business expenditures under this Income Tax Act.

One can claim the tax deductions on the interest paid and not on the principle that is repaid. However, one cannot claim this tax benefit if one is utilizing the borrowed funds to transform the mortgaged property. Also, one cannot avail tax exemptions if the loan amount is used for personal expenses like a holiday, wedding, marriage, education, etc.

Must Read: Difference Between Secured and Unsecured Loan

Tax Benefit under Section 24 (B):

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.

No Tax exemption under Section 80C:

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.

Tax Benefits on Top-up Loans:

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.

Dos and Don'ts While Claiming the Deduction

Even if you have missed making the actual payment, you can still go ahead with claiming your income tax deduction on your loan against property. This is due to the fact that Section 24 of the Income Tax Act states the terms “paid or payable” in relation to the interest payment of loan against property.

Having said that, you must have all your documentation in order should the income tax authorities seek proof of interest payment at a later stage. For top-up loans, one must again adhere to the same guidelines and ensure that all receipts and documents are handy. Moreover, these documents should be able to prove that the loan funds have been used for repair/ renovation of the property in order to claim any income tax benefits.

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