What are the Tax Benefits of a Loan Against Property?
Loan Against Property
The Indian financial market offers a plethora of options to prospective loan seekers, including both unsecured and secured loans such as a loan against property. This long-term, secured financing option offers a substantial sum repayable in an extended repayment tenor, allowing a borrower to cater to any financial requirement conveniently.
However, individuals need to consider how to save tax on loan against property before availing a substantial sum as loan.
Brief insight on a loan against property
33% – Increase in the number of accounts of loan against property holders.
Rs.34.93 lakh – Average balance held by loan borrowers in 2018.
56% – Percentage of borrowers between 30 to 49 years availing this financial product.
There are several reasons why these forms of credits have gained popularity in recent years. Unlike other forms of advances, these loans do not come with any end-use restriction, allowing borrowers to use a loan against property to mitigate a variety of requirements.
How to save tax on loan against property?
The Income Tax Act of 1961 provides several exempted categories to save tax during the repayment of a loan against property.
Let’s take a look at some of those clauses –
Exemption if utilised on business purpose
Tax exemption on the payable interest as well as associated fees and charges of a loan against property can be availed by borrowers if they utilise the loan amount for business purposes. Under Section 37(1) of the Income Tax Act, the amounts can be claimed as business expenses, helping a borrower save a significant amount of money.
Exemption if utilised to purchase another residential property –
Borrowers can also avail tax benefits on loan against property if they utilise the amount to purchase another residential property for themselves. Under Section 24(b) of the Income Tax Act, a maximum of Rs.2 lakh can be claimed as exemption under this category. However, this provision is applicable for salaried individuals only.
In both cases, beneficiaries will have to successfully show that the end use of loan amount adhere to the prescribed regulations of the above mentioned taxation acts. Also, Section 37(1) as well as Section 24(b) allows tax exemption only on the interest amount, rather than the principal sum.
Exemption if utilised to finance higher education
Individuals can also avail tax exemption if they use a loan against property to finance their child’s higher education under Section 80E, as per the Income Tax Act 1961. This exemption is allowed on the interest component of EMIs up to Rs.1.5 lakh per annum.
Note that only individuals can avail this exemption, not applicable for HUFs or other groups or organisations.
Un-exempted categories –
Despite being a secured loan, there are some rules that do not provide any tax exemption. Here are those categories.
Renovating the mortgaged property
The loan against property process does not allow borrowers to claim any tax exemption if they utilise the loan amount to renovate or repair the mortgaged property.
Borrowers cannot apply for tax exemption if they utilise the money for personal expenses. Personal expenses usually refer to family occasions, expenses related to higher education, etc. It is necessary to understand all the clauses of loan against property in detail as these will help a customer reap the maximum benefits.
Moreover, tax exemptions cannot be claimed if a borrower mortgages a residential property for a credit. Unlike other secured credits (such as home loan), borrowers cannot benefit from Section 80C, as these allow an individual to claim tax exemption against completed residential properties only.
These are some of the ways a borrower can enjoy tax exemption against their loan against property. Other than that, there are several other types of benefits that Housing Finance Companies offer with these credits.
Benefits and features of loan against property
Along with knowing how to save tax on loan against property, borrowers should also be aware of other features of this credit.
Balance transfer facility –
Most Housing Finance Companies offer balance transfer facility, where an individual can transfer their existing loan account to another lender to avail a lower rate of interest. Balance transfer facility can prove to be an ideal way to lower the applicable rate of interest, and help save a substantial sum throughout the repayment tenor.
One can also avail a top up loan while transferring their loan account. Reputed companies offer a high-value top-up loan to eligible customers against affordable rate of interest. It can prove beneficiary to mitigate any additional financial obligations.
Pre-approved offers –
Companies like Bajaj Housing Finance Limited provide pre-approved offers to existing customers, simplifying the application process and helping them save time. You can check your pre-approved offers by sharing only some essential details online.
Loans against property can be an ideal financial product for individuals in need of a substantial sum of money. With benefits like large loan amount, and affordable interest rate, it can help a borrower mitigate their financial requirements conveniently. Additionally, when individuals are aware of how to save tax on loan against property, it allows them to mitigate their financial burden on account of such loan as well.