Tax Benefits on Interest on Loan Against Property
At some point in our lives, we have all faced a financial crunch when we needed funds badly. Some sell their properties to get the funds. But, using the same as collateral is a better proposition to avail of a loan when required.
By selling the property, you lose ownership of it but when you use it as collateral to avail of a loan, you can get back the ownership of the same on repayment of the loan. In times of need, you can apply for the best property loan available in the country and also enjoy other benefits, such as low interest rates as compared to other loans, interest on loan against property tax benefits, etc. Using the property loan calculator, you can ascertain the EMI to be paid for such loans and understand how the EMIs will affect your financial planning.
Now, if you are planning to take a loan against property, you must also understand when and how you can claim tax benefits on such loans. Read on to know more.
When Can One Claim Tax Benefits on a Loan Against Property?
Here we shall discuss the tax benefit options available for loan against property. One can claim tax benefits on loan against property if:
- The fund is being used to purchase a residential property, as per Section 24(B)
- It is used exclusively for business expenses, as per Section 37(1)
No tax benefits for this type of loan are applicable if:
- The loan amount is used for medical expenses
- It is used to fund education
- The loan amount is used for paying personal expenses, such as travel, wedding, etc.
- The funds are used to remodel or renovate the mortgaged property
What Is Interest on Loan Against Property Tax Benefits?
Several clauses under Section 80C allow you to claim tax benefits. You are eligible to get tax benefits even when you have an ongoing home loan, however, there are no tax benefits for Loan Against Property under Section 80C of the Income Tax Act. Using the funds to buy a home will still not give you the tax benefits of home loans listed under Section 80 (C). You can claim tax benefits on loans against property under Section 24(B) and Section 37(1) of the ITA.
Tax Benefits Under Section 24(B)
Salaried individuals can claim income tax benefits on loans against property under this act. It is applicable only if you use your loan amount to fund your residential property. In this case, you can claim tax deductions up to INR 2 lakhs on the interest portion of the EMI paid in a financial year. However, at the time of filing your tax returns, you will have to provide the appropriate documents as proof to establish that the borrowed loan amount has been used to buy a residential property.
An important thing to note here is that one can avail of tax benefits on interest payments and not the principal amount. In fact, you cannot claim tax benefits under Section 24(b) if the fund received from the loan against property is used to renovate the property that is mortgaged or for paying any other personal expenses. Thus, interest on loan against property tax benefits is a huge relief for the loan against property borrowers.
Tax Benefit under Section 37(1)
Tax deductions under Section 37(1) are applicable on loans against a property when the loan amount is used for business purposes. You can claim loan against property tax benefits only on the interest charges, processing fees, as well as documentation fees that you would incur as an item of business expenditure. Thus, you can claim deductions if:
- The expenses are not covered under Sections 30-36 of the same, such as the cost of advertisement
- The expense incurred is not of a capital nature
- The expenses have been incurred in the previous financial year
- The expenses incurred were used for business and professional purposes
With the pandemic leaving many people jobless and unemployed, there are many who are facing a cash crunch and are in immediate need of funds. People start panicking in such situations and end up making rushed decisions like selling assets like homes to fulfil their immediate needs for cash. A loan against property is a better option in such cases with interest on loan against property tax benefits for the borrower. Using the property loan eligibility calculator, you can check if you are eligible for such a loan or not. If you are, use your property as collateral to get an easy loan against property (the interest charged is lower than a personal loan) and also retain ownership of the house. So, in case you are running short of funds, you can mortgage your property to avail of immediate funds as well as, in some cases, enjoy tax benefits.