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 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 plot loan is possible, or in other words, the plot loan tax benefits.
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.
Now that you have understood when an income tax rebate on plot loans is possible, let’s see an example.
Example to understand the tax benefits
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.
How to avail tax benefits on a plot purchase loan
Now, let’s see how you can get tax benefits on plot purchase loans.
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 benefits on plot purchase loans 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 benefits on plot purchase loans 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.
Now that you understand the plot loan eligible for tax exemption, let’s see where it is recommended to buy plots.
Best Cities to buy a plot in India
Below is the list of best cities where a plot can be purchased and you can claim the tax rebate on a plot loan:
· 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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10 December 2024
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