2 min read
25 May 2021

Tax benefits on your loan against property

Both salaried and self-employed professionals can benefit from loan against property. Individuals can pledge residential or commercial properties as collateral to borrow funds to meet their financial requirements. For instance, Bajaj Finserv’s Loan Against Property offers a maximum loan amount of Rs. 5 crore for salaried individuals.

Being a secured loan, loan against property offers competitive loan against property interest rates compared to unsecured loans. They are long-term commitments with longer repayment tenures. For example, Bajaj Finserv offers a loan against property with a tenure up to 15 years*.

Additional Read: Fees and charges of Loan Against Property: Explained

Tax benefit under Section 24(b)

When you borrow a loan for purchasing a house, construction purpose, renovating or repairing your existing house, as a taxpayer you can claim a deduction on the interest of this loan under Section 24(b) of the Income Tax Act.

1. Home loan interest deduction for self-occupied property:

If the loan is taken for a self-occupied property (i.e., the individual and family reside in the house), the maximum deduction allowed is up to Rs. 2 lakh per financial year.

2. Home loan interest deduction for let-out or deemed to be let-out property:

If the property is not self-occupied (let-out or deemed to be let-out), there is no upper limit on the interest deduction. The actual interest paid on the home loan during the financial year can be claimed as a deduction.

3. Additional deduction for affordable housing:

An additional deduction of up to Rs. 1.5 lakh is available on interest paid for loans taken for the purchase of an affordable house. This deduction is available from the financial year 2019-20 onwards.

4. Conditions for deduction:

  • The loan must be for the purpose of purchase or construction of a residential property.
  • The construction or acquisition must be completed within 5 years from the end of the financial year in which the loan was taken.

No tax exemption will be provided in the following scenarios

In case you apply for a loan against property to use the amount for purposes such as education, marriage, travel or medical bills - then these won’t be covered under tax exemption.

These scenarios include situations where the loan amount is used for purposes such as education, marriage, travel, or medical bills. Here is a breakdown:

1. Loan usage for non-housing purposes:

If you take a loan against property with the intention of using the funds for non-housing purposes like education, marriage, travel, or medical expenses, the interest paid on such loans may not qualify for tax exemption.

2. Non-qualifying expenses:

Certain expenses, such as those related to education, marriage, travel, or medical bills, are not considered eligible for tax benefits when incurred through a loan against property. The tax laws typically provide deductions for specific purposes like home purchase, construction, or renovation.

3. Distinguishing eligible and non-eligible expenses:

Tax laws generally distinguish between expenses that qualify for deductions and those that do not. While loan against property can offer tax benefits for housing-related purposes, using the loan for non-eligible expenses may not provide any tax exemptions.

Tax benefits from loan against property

A loan against property gives you funds for your varied needs; you can also claim tax exemption on the interest paid for availing of the loan. Here’s how you can save your tax with a loan against property:

  1. You can claim tax exemption from a loan against property if the loan amount is utilised for business purposes. In such cases, benefits can be claimed against interest paid and associated fees and charges incurred. These payables can be claimed as business expenses under Section 37(1) of the Indian Income Tax Act.
  2. Salaried individuals can also claim benefits under Section 24(B) of the Income Tax Act if the borrowed funds are utilised for funding the purchase of another residential property. The maximum deduction one can claim is Rs. 2 lakh. However, you will only be allowed to avail of the benefits if you could successfully establish a link between the borrowed funds and their end-use in accordance with Section 24(B).
  3. You can’t claim tax benefits if you are utilising the funds to transform the mortgaged property.
  4. Both Section 37(1) and Section 24(B) enables you to claim deductions only on the interest paid and not on the principal repaid.
  5. You can’t avail of tax exemptions if the borrowed sum is utilised to fund personal expenses like marriage, education, vacation, etc.
  6. Unlike home loans, you cannot claim tax exemption from loan against property under section 80C, as under this section, an individual can only claim exemption against entirely constructed residential properties.

Thus, a loan against property apart from providing funds for varied needs also helps you save on taxes.

Additional read: How to apply for a Loan Against Property: A step by step guide

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Frequently asked questions

Can I get tax benefit on loan against property?

you can potentially receive tax benefits on a Loan Against Property (LAP). These benefits primarily apply to the interest paid on the loan under Section 24(b) of the Income Tax Act. The maximum deduction for self-occupied properties is Rs. 2 lakh annually, with no upper limit for properties that are let out or deemed to be let out. An additional deduction may be available for first-time homebuyers under Section 80EE. Tax benefits on the principal amount are not provided, and the specific rules and eligibility criteria may change, so consulting a tax advisor is advisable for accurate guidance.

Can we get tax benefit on plot loan?

Tax benefits on a plot loan are generally not available. These benefits primarily apply to home loans for residential property. Interest and principal payments on plot loans are typically not eligible for tax deductions. If you plan to construct a residential property on the plot in the future, you may then be eligible for tax benefits related to the home construction loan. It is advisable to consult a tax advisor for specific guidance, as tax laws can change over time.

Can I claim tax benefit on home loan before possession?

You can claim tax benefits on a home loan before possession. The interest paid during the pre-construction period can be claimed as a deduction spread over five years. After taking possession, you can claim the entire interest paid. Principal repayment deductions are available only after possession. Proper documentation and a completion certificate are essential for accurate claims. Consult a tax advisor for specific guidance.