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 on a loan against property?
Tax provision
Income tax implication on a loan against property
Tax Exemptions Under Section 24(B)
Tax deduction of up to Rs. 2 lakhs on the interest paid
Tax Exemptions Under Section 37(1)
Rebate on the processing fee, documentation fee, and interest if the loan is used to meet business expenses
– Section 24(B)
Under this section, salaried borrowers can enjoy tax exemptions of up to Rs. 2 lakhs if they use the loan against property to buy a new residential property. To avail of this tax benefit, the loan must have been taken for the purpose of purchase, construction, or repair of a residential property. If you use the loan to purchase or construct a property, you can claim the deduction if the acquisition or construction is completed within 5 years of taking the loan.
– Section 37(1)
Under Section 37(1), you can claim tax benefits if you’ve taken the loan to meet business expenses. Borrowers can claim rebates on the processing fee, documentation fee, and even the interest paid on the loan amount. These amounts can be claimed as business expenses during the time of filing the claim. However, it’s important that the loan amount is exclusively used for the purpose of the business.
No Tax Exemption will be provided in the given scenarios:
While a loan against property comes with flexible usage, not all uses qualify for tax exemptions. Here are some situations that don’t qualify for tax exemptions:
-Loan used for non-housing purposes
If you use a loan against property for purposes other than purchasing, constructing, or repairing a residential property, the interest paid does not qualify for tax deductions under the Income Tax Act. The only exception is using the funds for business purposes, for which you can claim rebates by proving the funds were used to meet business expenses.
-Non-qualifying expenses
Although you can use the loan against property funds to meet various financial needs, expenses related to education, marriage, travel, or medical bills do not qualify for tax benefits. Therefore, it’s important to carefully understand the tax benefits and implications to select the best strategy for your situation and make informed decisions.
Tax Benefits of availing 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 eligiblity for a loan against property 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.
No, the loan amount received from a loan against property is not considered taxable income. It is a secured loan and is not subject to income tax. However, if you generate any income using the loan amount (such as investment returns), it might be taxable.
2. Does a loan against property come under 80C?
No, a loan against property does not come under 80C. Section 80C provides tax deductions for principal repayment of a home loan, life insurance premiums, and other specified investments.
3. How much interest is paid on a loan against property?
The interest rate on a loan against property varies depending on the lender, loan amount, tenure, and your credit profile. Generally, interest rates for loans against property range between 8% and 15% per annum.
4. How much ITR is required for a loan against property?
Most lenders require borrowers to submit their ITRs for the past 2-3 years to process a loan against property application. This helps the lender assess the borrower’s income stability and repayment capacity.
5. Can a loan against property be converted to a home loan?
No, it is not possible to convert a loan against property to a home loan. However, you can close the existing loan and take a new home loan if you wish to buy or construct a house.
03 September 2024
7 mins read
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