Availing loans against properties, be the property is residential or commercial, is one of the oldest forms of credit. When a person can’t get a personal loan or business loan, keeping his existing property can get him credit from a financial institute. As the loan is availed against property, there are certain tax benefits that one can enjoy for the same. This article will give insight into the tax benefits on loans against property that are available in India and how one can make use of the same.
What is a loan against property?
A loan against property is a secured loan where one keeps the property as collateral security for availing a loan. The value of the loan is derived as per the current valuation of the property. A certain percentage, say, for instance, 70% or 80% of the value of the property is disbursed as a loan amount to the applicant. The borrower can get a loan against property income tax benefits as well, unlike other types of loans.
Many people confuse mortgage loan income tax benefits with tax benefits for home entity loans. These two are not the same. The two loans are only different. A home entity loan is a home loan that one avails for building a home. At the same time, tax benefits on loans against property can be availed against loans taken by pledging the property which is already existing.
What are the tax benefits available for LAP?
There are two sections in the Income Tax Act, which offers loan against property income tax benefit.
- Section 24 (B):
Under this section, salaried people can avail tax be of benefits on loans against property. However, the tax rebate on the loan against the property will be applicable if the fund is used for building a new residential house. In this case, the borrower can avail of tax deductions up to Rs. 200000. These income tax benefit on loan against property is applicable on interest payments.
- Section 37 (1):
If the borrower uses the fund for business purposes, then he can avail income tax rebate on a loan against property under section 37 (1). The borrower can claim the mortgage loan income tax benefits on the processing fees of the loan against property, interest charges, and also the fees levied for documentation of the loan. In short, any expense that is not capital expenditure or a person can be used for availing tax benefits on a loan against property under this section.
Things to consider while availing tax benefits against LAP
For availing tax benefits on loans against property, certain things need to be kept in mind.
- The borrower cannot avail loan against property income tax benefit if the loan amount is utilized for travel, marriage or other personal events, education, and even on medical bills. So, for availing of the mortgage loan income tax benefits the fund needs to be utilized only for building residential property or for expenditure.
- There is no tax rebate on loans against property under section 80 C of the Income Tax Act. The tax benefits available under section 80 C is for home entity loan not for loan against property. Even if the borrower has a home loan running simultaneously with the loan against property, then also, there won’t be any income tax benefit on the loan against property.
Benefits of availing of Loan against property:
While an income tax rebate on a loan against property is one of the most important benefits of a loan against property, there are many other benefits that one can consider.
- Large sanction:
As a loan against property is a secured loan, the amount one can avail as a loan is quite large as around 70% to 75% of the property value can be sanctioned as a loan. So, if someone is looking for a loan for business growth or building a new residential property and is short of cash, then applying for a loan against property will help them get a fast loan along with income tax benefits for a loan against property.
- Lower interest rate: Since the borrower keeps property as collateral, the risk of the lender reduces if the borrower defaults on repaying the loan. This is why the interest rate is also lower for loans against property. So, one can not only enjoy tax benefits for loans against property. So, a loan against property can be used as a two-way sword that helps in saving interest as well as providing tax benefits. The borrower can save a lot compared to other types of loans where large amounts are sanctioned.
- Longer repayment tenure:
Another benefit of availing of a loan against property is the longer repayment tenure. These loans can be paid over many years as per the borrower’s preference. Usually, no personal loans or business loans have much longer tenure. Since it is a secured loan, the tenure can be decided at per convenience of the borrower and stretched over many years.
Wrapping up
So, a loan against property can be used for tax savings as there are different tax rebates on loans against property. That said, the borrower must consider the use of the funds as that would determine his eligibility for availing of the tax benefits. Availing of a loan against property from Tata Capital is comparatively easier as it is a secured loan and beneficial for the borrower at the same time for multiple aspects.
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08 February 2024
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