Maximizing Tax Benefits with Property Loans

Property Loans

If you own a residential or commercial property, you can leverage its value by availing yourself of a loan against it. It does not matter if you have rented out the property or if you inhabit it. As long as all the property papers are in your name, you can avail yourself of a loan against this property that you own. Such loans are called loans against property. In India, people also refer to these loans as simply property loans or mortgage loans. 

How loans against property work is quite simple. The borrower pledges their property to avail of a loan. In return, the lender sanctions a loan amount equal to up to 75% of the pledged property’s current market value. Keeping in mind the assurance provided to them through the pledged property, lenders charge a low rate of interest on loans against property.

In fact, with high-quality collateral, a stable income and job and a credit score above 750, borrowers can easily avail themselves of a loan against property at interest rates starting as low as 8.50% per annum. Further, loans against property are also one of the very few loan options that give credit borrowers uninterrupted access to substantial funds, allowing them to fulfil all kinds of personal and professional needs.

Lastly, borrowers can also avail tax benefits property loans and reduce their tax burden in any given financial year. This article focuses on the loan against property tax benefits. Read on if you desire to increase your knowledge on this topic. 

Loan Against Property Tax Benefits 

Loan Against Property Tax Benefit Under Section 24(b) 

Borrowers can claim tax benefits on their loan against property or property loan if they use the loan money to buy another property. In this case, borrowers can claim tax benefits up to Rs.2 Lakh under Section 24b of the Income Tax Act on payments they have made towards the repayment of the interest component of their loan.

Other than acquiring the property, even if you use the money to construct, repair or renovate your property, you can still avail property loan tax benefit under Section 24b. However, one cannot claim tax deductions through their loan against property under Section 80C of the Income Tax Act. This means payments made towards the repayment of the principal component of the loan come under the taxable category. 

Loan Against Property Tax Benefits Under Section 37(1) 

Loan against property borrowers can also avail of property loan tax benefits under Section 37(1) of the Income Tax Act if they used the funds to pay for expenses related to their business and these expenses are included in the Profit & Loss statement of the company or business. One must keep in mind that to be able to claim tax benefits under this section, one must provide proof of expenses.  

In conclusion, other than helping borrowers get access to a hefty loan principal at low interest rates, property loan tax benefits also allow borrowers to reduce their yearly tax liability. However, given how the demand for these loans is growing with each passing year, borrowers must check their loan against property eligibility before applying for the loan. Those who do not meet their lender’s property loan eligibility requirements should improve their eligibility first and then apply for a loan. Doing so would increase their chances of getting approved for a loan as well as availing of this loan on the best possible loan terms and conditions.

Further, it would reduce the chances of one’s loan application getting rejected. Loan borrowers must also keep themselves open to the idea of a loan against property balance transfer, especially if they find another lender willing to refinance the loan at a lower rate of interest. However, keep in mind that with the remaining loan tenor at 10 years, there must at least be a 25bps difference in one’s new and old interest rates for the loan against property balance transfer to prove beneficial in the long run.

Also Read: A Deep Dive into Practical Advice for Obtaining a Personal Loan in India

A loan against property balance transfer calculator can help lenders decide if a balance transfer would indeed be the right choice for them. Loan borrowers must also use a loan against property EMI calculator to plan their repayment strategy and do monthly budgeting.

1. How can property loans help in maximizing tax benefits?

Property loans offer tax benefits through deductions on both principal and interest payments. The principal repaid qualifies under Section 80C, while interest payments can be claimed under Section 24(b).

2. What are the eligibility criteria for availing tax benefits on property loans?

To claim tax benefits, you must be a co-borrower or owner of the property. Additionally, the property’s construction should be completed, and the home loan should be taken from a recognized financial institution.

3. Can I claim tax benefits on both the principal and interest components simultaneously?

Yes, you can. The principal amount falls under Section 80C, and the interest paid is eligible for deduction under Section 24(b), providing you with dual tax benefits.

4. Are there any restrictions on the amount of tax deduction for property loans?

The tax deductions on property loans are subject to specific limits. Ensure you are aware of these limits to maximize your benefits and consult a tax professional for personalized advice.

5. What is the impact of joint home loan applications on tax benefits?

Joint applicants can individually claim tax benefits, making it a lucrative option. However, it’s essential to understand the implications and discuss them with a tax advisor for a comprehensive overview.