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All About Plot Loan Tax Benefits

All About Plot Loan Tax Benefits

Everyone may not have the same taste when it comes to building a house of their own. Some may prefer a ready home while others may want to buy a plot of land to build a house. With loans now easily offered by most lenders for both residential property and plot purchases, buyers can easily make their choice.

A plot loan implies a loan provided by a lender to a borrower to buy a piece of land (plot) to build their home. A plot loan is a type of home loan that can be availed only for constructing a residential property. While finalising any loan, borrowers look at the tax benefit offered by such loans.

However, while purchasing a plot with a plot loan, many buyers often wonder whether they can avail of a plot plus construction loan tax benefits. The income tax benefit on a plot purchase loan would depend on what a borrower intends to do with the purchased plot.

Keep reading this article to know whether a plot loan is eligible for tax exemption, how much tax rebate on a plot loan is possible, or in other words, the plot loan tax benefits.

What Is a Plot Loan and How Is It Different? 

A plot loan or a land loan is disbursed for the sole purpose of purchasing a piece of land, which can be used for building a home or a real estate portfolio in the future. 

Unlike a standard home loan, which is taken for under-construction or ready-to-occupy residential property, a plot loan is designed only for purchasing a vacant plot of land, usually found within the limits of a municipality or corporation, giving you the flexibility to build later.

Plot loans usually come with shorter repayment tenures and slightly higher interest rates than home loans. This is because buying a plot without building on it is seen as riskier by lenders. If construction doesn’t happen, the property’s value may not grow as expected.

Also, read – Token money: Meaning, purpose & important things to know

Plot Loan Tax Benefits: Know How It Works

Tax benefits come in handy when availing of home loans. So, borrowers expect an income tax rebate on plot loans, also. The question of whether plot loan tax exemption is available is dependent on what purpose the plot purchased is meant to be used for.

A buyer may purchase a plot as an investment with no intention to build a house, villa, etc. They may have invested from a long-term perspective and are expecting appreciation in the plot value over time. So, they wish to keep it vacant and sell it later for a profit when the plot value increases. In such a scenario, they are not eligible for plot loan tax benefits.

If a buyer buys a plot to build a home, villa, or any other building, then they can claim income tax benefits on the plot loan. Both the plot plus construction loan tax benefits can be availed by the purchaser. It means they get the benefit of a plot loan taken to buy the plot plus the home loan for plot tax benefit to build a home on the plot. So, a borrower gets a twin tax exemption.

Tips to Help You Enjoy the Benefits of the Plot Loan 

Here are some smart tips to help you make the most of your plot loan and enjoy its full benefits:

1. Make sure whatever construction you are going to do on the plot is completed within 5 years so that you can enjoy tax benefits.

2. If you buy the property with a family member and take a joint loan, both of you can claim tax deductions. This means double the total tax savings for your household.

3. Keep proper records of your EMI slips, sanction letters, and completion certificates. These documents are essential proof for tax deductions and future verifications.

4. You can claim any interest paid during the plot purchase or construction period after the construction is finished.

5. Lastly, you can also consult a tax advisor to ensure you are not missing out on any eligible benefits.

Also, read – Pledge vs hypothecation vs mortgage: Key differences

Who Can Avail of Plot Loan Tax Benefits 

Your eligibility to claim plot loan tax benefits depends on a few key conditions related to ownership, construction timelines, and how the loan is used. Here is what you must be aware of:

  • The loan must be used only to buy a residential plot, not agricultural or commercial land.
  • The land should fall within a municipal or corporation area.
  • Construction on the plot must be completed within 5 years of the loan being sanctioned.
  • If you live in the property yourself, you may qualify for higher tax deductions than if you rent it out.
  • You must be the legal owner of the plot, and all documents, including construction proofs, payment receipts, and financial records, must be properly maintained. 

Also, read – Can you claim home loan interest tax benefits before possession?

How to avail tax benefits on a plot purchase loan

Now, let’s see how you can get any tax benefit on plot purchase loan.

The above example shows that a plot loan income tax benefit can be claimed only when a house is constructed on the same plot. Also, the plot loan tax exemption becomes eligible in the year when the construction gets completed. Post completion of house or building construction, the plot owner can claim the below plot loan income tax benefits.

1. Plot Loan Tax Benefits under Section 80C

Section 80C of the Income Tax Act 1961 states a plot owner can claim a tax rebate on a plot loan up to Rs.1.50 lakhs on the principal component of the plot loan plus a home loan that gets repaid in a fiscal year. The principal amount is the original amount of the loan and does not include the interest portion. However, fees related to registration and plot title transfer form part of Section 80 C deduction, provided their payment is made during the year when home construction activity is completed.

2. Plot Loan Tax Benefit under Section 24

Section 24 of the Income Tax Act 1961 allows for plot loan income tax benefits on the interest component. To claim the plot loan tax exemption under Section 24, the construction of the house much be completed and the borrower should occupy the house. Then, they can claim a plot loan income tax benefit on interest up to Rs. 2 lakhs annually. This deduction cannot be availed if you do not reside in the house post its completion and give it on rent. The plot loan can be easily converted to a home loan by submitting a completion and occupancy certificate to the lender. Then, you can avail of tax benefit on plot purchase loan on interest.

3. Additional Plot Loan Income Tax Benefits

Deduction on Interest Rate

As per the Income Tax Act 1961, if anyone purchases a plot to build a home, they can get plot loans at a low rate of interest. This is beneficial to the borrower as they get a plot loan at a lower rate of interest which results in lower EMIs.

Low Pre-construction Interest Rate

The Income Tax Act 1961 allows for additional tax benefit on plot purchase loan through a reduced pre-construction rate of interest. When a borrower begins building activity at the start of a fiscal year, they get a deduction of the pre-construction rate of interest. This deduction is from the same year and can be claimed in 5 installments. It is available up to Rs. 2 lakhs provided the borrower resides in the property.

Also, read – What is Home Loan Prepayment and How Does it Work?

Example to understand the tax benefits

Now that you have understood when an income tax rebate on plot loans is possible, let’s see an example.

Meera decides to buy a land plot for Rs. 25 lakhs. She approaches a bank to avail of a loan of Rs. 25 lakhs. After one year, Meera plans to build a house on the same plot. The estimated cost of construction is Rs. 40 lakhs. She further decides to avail of a home loan for Rs. 40 lakhs. Combining the plot loan and the home loan, the total loan availed by Meera is Rs. 65 lakhs.

So, can Meera claim an income tax rebate on a plot loan?

Yes and no. For the first year of plot purchase, Meera cannot claim plot loan tax exemption. It is because there is no construction of a house on the plot.

However, Meera can claim the plot plus construction loan tax benefit on the combined loan amount of Rs. 65 lakhs from the time of construction of the house to its completion.

Best Cities to buy a plot in India

Now that you understand the plot loan tax exemption, let’s see where it is recommended to buy plots.

Below is the list of best cities where a plot can be purchased and you can claim plot loan income tax benefits: 

  • Bengaluru
  • Ahmedabad
  • Gurugram
  • New Delhi
  • Chennai
  • Hyderabad
  • Noida
  • Pune
  • Thane
  • Ghaziabad
  • Faridabad

Conclusion

A borrower can claim plot loan tax exemption provided they complete the construction of the house. It’s important to understand the plot loan eligible for tax exemption to avoid disappointment later. Tata Capital offers tailored home loan including plot loans at attractive interest rates. These loans come with customised EMI plans, flexible repayment options, hassle-free processing, and quick disbursals. For more details on plot loans, visit the Tata Capital website.

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FAQs

When can I start receiving benefits from the plot loan tax?

Plot loan tax benefits become available only after you finish building a house on the land. Once the plot is developed for residential purposes, you can claim deductions on the interest you pay and certain related costs. To qualify for plot loan tax exemption, the construction must be completed within five years from the end of the financial year in which the loan was sanctioned.

Which papers do I have to provide to receive tax benefits on my plot loan?

To claim tax benefits on a plot loan, you’ll need to provide your loan sanction letter, interest certificates, and a completion or occupancy certificate. 

 

Once the construction is finished within the five-year limit, you can use these documents to claim deductions under Sections 24 and 80C of the Income Tax Act when filing your ITR.

Is it possible to deduct pre-construction interest on plot loans from tax?

 

Yes, you can claim pre-construction interest deductions on your plot loan, but only after the house is fully constructed. Beginning from the year the construction is completed, the total interest can be claimed in five equal yearly instalments. Bear in mind that this benefit applies only if you or your immediate family uses the property.

Do both co-owners of a plot of land have the right to claim tax benefits?

 

Yes, co-owners also have the right to claim plot loan income tax benefits, but only if they are also co-borrowers and each pays their share of the loan. According to Section 24 of the Income Tax Act, each co-owner can deduct their portion of the interest, while Section 80C lets them claim principal repayment.

How can I own land and not pay taxes?

Although you can't completely avoid taxes legally, it's possible to reduce your tax burden through exemptions and deductions. 

For instance, you can claim plot loan income tax benefits when the loan is used to build a residential house on the plot. The interest you pay on the loan can be deducted under Section 24, and principal repayments under Section 80C of the Income Tax Act.

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