How To Avail Tax Benefits on Your Loan Against Property?

Priya Sharma owns an organic food processing business in Mysuru, Karnataka. As demand for her products grows, she receives an opportunity to supply packaged foods to a large international retailer. To fulfil the order, she needs to upgrade her processing unit, install automated machinery and increase raw material inventory. While the expansion can help her business grow, using all her working capital could affect day-to-day operations.

Many business owners face a similar situation when they need funds for expansion. According to the Ministry of MSME Annual Report 2024-25, India has more than 7.4 crore MSMEs, contributing nearly 30% to the GDP, around 36% of manufacturing output and about 45.7% of exports. Access to long-term funding plays an important role in helping these businesses grow.

A Loan Against Property (LAP) allows borrowers to raise funds by pledging a residential, commercial or industrial property while continuing to own and use it. Apart from providing access to capital, borrowers may also be eligible for Loan Against Property tax benefits, depending on how the loan amount is used. Understanding the applicable provisions of the Income Tax Act, 2025 can help you determine whether you can get tax benefit on a Loan Against Property, the conditions for claiming deductions and the documents required while filing your income tax return.

How Does Mortgage Loan Interest Become Tax Deductible?

The tax benefit on a Loan Against Property depends on how you use the loan amount, not on the property you pledge as security. If the funds are used for eligible business or residential purposes, the interest paid may qualify for tax deductions under the Income Tax Act, 2025. If the loan is used for personal expenses, no tax benefit is generally available.

If the Loan is Used for Business

If you use the loan entirely for business purposes, such as expanding your business, purchasing machinery, buying raw materials or meeting working capital needs, the interest paid may be claimed as a business expense under Section 37(1) of the Income Tax Act, 2025, subject to the applicable conditions.

In eligible cases, there is no specified upper limit on the amount of interest that can be claimed. Expenses directly related to obtaining the loan, such as processing fees and documentation charges, may also be allowed as business expenses if they meet the conditions prescribed under the Act.

If the Loan is Used for a Residential Property

If the loan amount is used to purchase, construct, repair, renew or reconstruct a residential property, the interest paid may be eligible for deduction under Section 24(b) of the Income Tax Act, 2025.

• Self-occupied house: You can claim a deduction of up to ₹2 lakhs per financial year on interest paid for the purchase or construction of a house, subject to the applicable conditions. For repair, renewal or reconstruction, the deduction is generally limited to ₹30,000 per financial year.
• Let-out house: The actual interest paid may be claimed while calculating income from house property, subject to the provisions relating to the set-off and carry forward of losses under the Income Tax Act, 2025.

Understanding how the loan funds are used can help you determine whether you are eligible to claim tax benefits and under which section of the Income Tax Act, 2025.

Loan Against Property Can Be Claimed Under Which Section?

A common question among borrowers is: Can I get tax benefit on a Loan Against Property? The answer depends on how the loan amount is used, not on the property pledged as collateral. Under the Income-tax Act, 2025, tax benefits are generally available only on the interest paid, provided the loan is used for an eligible purpose and all prescribed conditions are met.

Does the Principal Repayment of a Loan Against Property Qualify for Tax Benefits?

The principal repayment of a Loan Against Property does not qualify for a tax deduction under the Income-tax Act, 2025.

However, the interest component may be eligible for tax benefits depending on the purpose of the loan:

• If the loan amount is used wholly and exclusively for business or professional purposes, the interest paid may be claimed as a business expenditure under Section 37(1), subject to the applicable conditions.
• If the loan amount is used to purchase, construct, repair, renew or reconstruct a residential property, the interest paid may qualify for deduction under Section 24(b), subject to the provisions and limits specified in the Income-tax Act, 2025.

Understanding the purpose of the loan before borrowing can help you determine the tax benefits available and ensure compliance while filing your income tax return.

When is Interest on a Loan Against Property Not Eligible for Tax Benefits?

Borrowers often ask, is mortgage loan interest tax deductible in every situation? The answer is no. If the loan amount is used for personal or non-eligible purposes, the interest paid cannot be claimed as a tax deduction.

Examples of non-eligible uses include:

• Funding family weddings or personal celebrations
• Paying for domestic or international holidays
• Meeting personal medical expenses
• Financing higher education expenses
• Repaying personal loans or credit card dues

Priya evaluated her funding options while planning the expansion of her food processing unit in Mysuru. Purchasing automated machinery and upgrading her manufacturing facility required an investment of ₹1 crore. Instead of using her working capital, she opted for a Loan Against Property by pledging her commercial premises. Since the entire loan amount was used exclusively for business expansion, the interest paid on the loan may qualify as a business expenditure under Section 37(1) of the Income-tax Act, 2025, subject to the prescribed conditions. This helped her reduce taxable business income while preserving cash flow for day-to-day operations.

For businesses seeking long-term funding, Godrej Finance Limited offers a fully digital Loan Against Property with quick processing, transparent terms and flexible repayment options, subject to eligibility and conditions of the lender.

Understanding the applicable provisions of the Income-tax Act, 2025 can help you claim eligible tax benefits on a Loan Against Property while ensuring compliance with the prescribed conditions.

Also Read: Loan Against Property for Business Expansion - A Complete Guide

How to Get Tax Benefits on Loan Against Property Step-by-Step?

Claiming tax benefits on a Loan Against Property requires proper documentation and correct reporting while filing your income tax return. Following these steps can help you claim eligible deductions under the Income-tax Act, 2025.

Step 1: Keep Records of How the Loan Was Used

Maintain documents that show how the loan amount was utilised. This may include invoices, payment receipts, bank statements or supplier bills. These records help establish that the borrowed funds were used for an eligible business or residential property purpose.

Step 2: Obtain Your Annual Interest Certificate

Request an annual interest certificate from your lender at the end of every financial year. The certificate provides a detailed breakdown of the interest and principal paid during the year and serves as an important document while claiming tax benefits.

Step 3: Report the Interest in the Appropriate Income Schedule

While filing your income tax return under the Income-tax Act, 2025, claim the interest deduction under the relevant head of income based on how the loan amount was used.

• Business use: If the loan was used wholly and exclusively for business or professional purposes, the interest may be claimed as a business expenditure under Section 37(1), subject to the applicable conditions.
• Residential property use: If the loan was used to purchase, construct, repair, renew or reconstruct a residential property, the interest may be claimed under Section 24(b), subject to the prescribed provisions and limits.

Maintaining proper records and reporting the deduction correctly can help ensure a smoother tax filing process and support your claim if required. Once you have determined that a Loan Against Property suits your funding requirements, estimating your monthly EMI can help you assess repayment affordability. A Loan Against Property EMI Calculator provides a quick estimate based on your loan amount, interest rate and tenure before you proceed with the application.

Also Read: How to Prepay Your Loan Against Property: Step-by-Step Guide

What Documents Are Mandatory to Prove Tax Exemption Eligibility?

Keeping the required documents ready can help support your tax deduction claim under the Income-tax Act, 2025. These records may also be required if your claim is reviewed by the tax authorities.

Income and Financial Documents

These documents help establish your income and show how the loan amount was used.

• Income Tax Returns (ITR) for the relevant financial years
• Profit and Loss Statement and Balance Sheet (for business borrowers, where applicable)
• Bank statements showing the receipt and utilisation of the loan amount
• Bills, invoices or payment receipts related to the purpose for which the loan was used

Loan and Property Documents

These documents confirm the loan details and the interest paid during the financial year.

• Loan sanction letter
• Annual loan interest certificate issued by the lender
• Registered sale deed or other ownership documents of the property, where applicable

Identity and Business Documents

These documents help verify the identity of the borrower and business details, where applicable.

• PAN Card
• Aadhaar Card or any other valid address proof
• GST Registration Certificate, Udyam Registration Certificate, Partnership Deed or Memorandum of Association (for business entities)

Maintaining these documents throughout the loan tenure can make it easier to claim eligible tax benefits and support your claim while filing your income tax return.

Final Thoughts

Understanding how to save tax on Loan Against Property allows business owners to secure essential capital while optimising overall tax liabilities. Claiming eligible interest deductions under Section 37(1) or Section 24(b) reduces total borrowing costs, making long-term property loans a cost-effective choice for business expansion. For Priya, securing a property loan and claiming eligible interest deductions allowed her to install advanced equipment, fulfil her supply contract on schedule and grow her organic food enterprise confidently.

Apply now for a Loan Against Property.

FAQs

Q.1. Can salaried individuals claim tax benefits on a Loan Against Property?

A. If the loan amount is used to purchase, construct, repair, renew or reconstruct a residential property, the interest paid may qualify for deduction under the applicable provisions of the Income-tax Act, 2025, subject to the prescribed conditions and limits.

Q.2. Does the principal repayment of a Loan Against Property qualify for tax benefits?

A. Under the Income-tax Act, 2025, the principal repayment of a Loan Against Property generally does not qualify for a tax deduction. Tax benefits, where available, apply only to the interest component if the loan is used for an eligible purpose.

Q.3. Can I claim tax benefits if I use a Loan Against Property for business?

A. If the loan is used wholly and exclusively for business or professional purposes, the interest paid may be claimed as a business expenditure under Section 37(1) of the Income-tax Act, 2025, subject to the applicable conditions.

Q.4. How much interest can I claim on a Loan Against Property used for a residential house?

A. If the loan is used to purchase, construct, repair, renew or reconstruct a residential property, the interest deduction is available under the applicable provisions of Section 24(b) of the Income-tax Act, 2025, subject to the prescribed conditions and limits.

Q.5. Can joint borrowers claim tax benefits on a Loan Against Property?

A. Where joint borrowers are eligible and the loan is used for a qualifying purpose, each borrower may claim tax benefits in proportion to their share in the loan and ownership, subject to the provisions of the Income-tax Act, 2025.

Q.6. Which documents are required to claim tax benefits on a Loan Against Property?

A. You should keep documents such as the loan sanction letter, annual interest certificate, bank statements, proof of end use of the loan and other supporting records, as these may be required while claiming tax benefits under the Income-tax Act, 2025.

Q.7. How do I claim tax benefits on a Loan Against Property?

A. Claim the eligible interest deduction while filing your income tax return under the appropriate head of income. Ensure that you retain supporting documents to establish the purpose for which the loan amount was used.

Q.8. Can I claim tax benefits on a Loan Against Property used for home repairs?

A. If the loan amount is used for the repair, renewal or reconstruction of a residential property, the interest paid may qualify for deduction under Section 24(b) of the Income-tax Act, 2025, subject to the prescribed conditions and applicable limits.

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