How Much Tax Benefit Can Be Availed on Loan Against Property?

What if your property could be more than just a home? Imagine turning it into a financial asset that helps you fund new dreams and unlock some other perks along the way.

Loan Against Property is a powerful way to fund your dreams and create joyful moments. But did you know about the hidden advantage to this financial move? When you apply for a Loan Against Property, you can enjoy certain income tax benefits too.

Read on to discover how you can get income tax benefits on Loan Against Property and make the most of a financial decision.

Also Read: What is Loan Against Property? Features, Eligibility, Documents, and more

Understanding Loan Against Property Tax Benefits

While the government does allow you to avail income tax benefits on loan against property or property loan, the specifics depend on the purpose of the loan.

If the loan is used for business purposes, the interest paid can be claimed as a business expense and help reduce your taxable income. Similarly, if the loan is used for purchasing another property, the interest paid can be claimed under Section 24(b) of the Income Tax Act, up to a limit of INR 2 lakh per annum for self-occupied properties.

However, there are no tax benefits linked to loan against property if the loan is availed for personal use, such as for vacation or wedding-related expenses. Understanding these nuances can help you make informed decisions and maximize your tax savings.

Loan Against Property Tax Benefits: Section 24(b), 37(1)

Find below a list of key sections under the Income Tax Act of 1961 that allow availing tax benefits on Loan Against Property -

Section 24(b): Taking a loan against property (LAP) not only helps in funding personal or business needs but also provides tax benefits on the interest paid. Section 24(b) of the Income Tax Act allows deductions on the interest component of your loan if the funds are used for buying, constructing, or renovating a residential property. This makes your loan against property more affordable while optimizing your tax liabilities. You can easily calculate the interest component and monthly installments using an online EMI Calculator

Deduction on Interest if LAP is Used for Buying/Constructing/Renovating a Residential House

• Self-Occupied Property: Claim a deduction of up to ₹2 lakh per year on the interest component of the loan.
• Let-Out/Deemed Let-Out Property: Entire interest paid can be claimed, but loss set-off under income tax is capped at ₹2 lakh per year.

Conditions for Claiming Tax Benefit

• Property acquisition or construction must be completed within 5 years from the end of the financial year in which the loan was taken.
• Deduction is applicable only on interest, not the principal repayment.
• Pre-construction interest can be claimed in five equal installments starting from the year of completion of construction.

Section 37(1): For borrowers using a loan against property (LAP) for business purposes, Section 37(1) of the Income Tax Act provides significant tax advantages. Expenses incurred on interest, processing, and documentation fees can be claimed as business expenditures, helping reduce taxable income and improving the financial health of your business.

Interest Deductible as Business Expense

The interest paid on a LAP used exclusively for business activities is fully deductible without any upper limit, reducing the overall taxable profit.

Associated Costs Deductible

Processing fees, documentation charges, and other costs associated with obtaining the loan can also be claimed as business expenses.

No Upper Limit on Interest Claim

Unlike personal loans or LAPs used for residential purposes, there is no cap on the interest amount that can be deducted if the loan is for business use.

Maintain Proper Records

It is important to maintain invoices, bank statements, and loan documents as proof of expenditure to claim deductions under Section 37(1).

It’s important to note that both sections 24(b) and 37(1) provide tax benefits only on the interest paid, not on the principal amount. Understanding these provisions can help you optimize your tax savings and make the most of Loan Against Property.

No tax exemption will be provided in the following scenarios

While loan against property (LAP) offers attractive tax benefits under Sections 24(b) and 37(1), these deductions are only applicable when the loan is used for residential or business purposes. If the borrowed funds are used for personal or non-housing purposes, no tax exemption can be claimed, even if interest is paid.

Personal/Non-Business/Non-Housing Uses

Tax exemption is not available when the loan is used for:

• Weddings – Funds used for marriage expenses do not qualify for interest deduction.
• Travel – Personal vacations or travel-related expenses are ineligible.
• Medical Expenses – Costs for treatment or healthcare cannot be claimed under LAP tax benefits.
• Children’s Education – Tuition fees or educational expenses are not eligible.
• Debt Consolidation – Using LAP to repay other personal loans or credit card debt does not provide any tax advantage.

Options for Claiming Tax Benefits on a Loan Against Property

Availing tax benefits on a Loan Against Property can be a smart financial move if done correctly. Here’s how you can avail tax benefits on Loan Against Property and easily navigate the process to maximize your tax savings:

The tax benefits on loan against property in India depend on how the borrowed funds are utilized. Proper documentation and understanding of the applicable sections can help maximize deductions and reduce taxable income.

If the Loan is Used for Housing Purposes

• Deduction on interest (up to ₹2 lakh per annum) for purchase or construction of a new residential property under Section 24(b).
• Deduction on interest for renovation or repair of an existing house.
• For let-out or deemed let-out properties, there is no cap on interest deduction; the full interest paid can be offset against rental income.

If the Loan is Used for Business Purposes

• Interest paid can be claimed as a business expense under Section 37(1).
• Associated costs such as processing and documentation fees are also deductible.
• Benefits apply to commercial property if the loan is used for business expansion, renovation, or working capital purposes.

Key Tips to Maximize Tax Savings

• Identify the purpose of your loan clearly before claiming deductions.
• Maintain all receipts, invoices, and loan statements as proof.
• Include relevant details while filing your income tax return.
• Consult a tax advisor to ensure maximum benefit and compliance.

By following these steps, you can effectively avail tax benefits on Loan Against Property, optimizing your financial strategy and maximising your tax savings. This strategic approach can significantly enhance your financial health and support your long-term goals.

Also Read: Is it Possible to get a Loan Against Property Without ITR?

Eligibility Rules for Loan Against Property Tax Exemptions

While a loan against property can offer significant tax benefits, there are specific situations where these benefits do not apply. It’s essential to understand these scenarios to avoid any financial surprises.

The tax benefits on a Loan Against Property in India depend on the end-use of the borrowed funds, not the loan itself. Only loans used for housing-related expenses or business purposes qualify for deductions under Sections 24(b) and 37(1). Personal expenses such as weddings, travel, education, or medical costs are ineligible for tax exemptions.

1. General Rule

• Tax benefits are applicable only if the LAP is used for housing or business purposes.
• No deductions are allowed for personal expenses like weddings, travel, medical, education, or debt repayment.
• Principal repayment does not qualify for Section 80C benefits under LAP.

2. Eligibility – Section 24(b) (Residential Property)

• Loan must be used for purchase, construction, renovation, or repair of a residential property.
• Property completion must occur within 5 years from the end of the financial year in which the loan was taken.

Deduction Limits:

• Self-Occupied Property: Up to ₹2 lakh/year (₹30,000 if construction exceeds 5 years)
• Let-Out Property: Full interest deduction allowed
• Principal Repayment: No deduction under Section 80C

3. Eligibility – Section 37(1) (Business Purposes)

• Loan must be used exclusively for business needs such as expansion, equipment purchase, or working capital.
• Deductible expenses include interest, processing fees, and documentation charges.
• No upper limit on interest deduction if proper records are maintained.

4. Ineligible Uses (No Tax Benefits)

• Weddings/marriages
• Travel/vacations
• Medical expenses
• Children’s education
• Refinancing personal debt

How to Maximize Tax Savings on Loan Against Property

To make the most of tax benefits on a Loan Against Property (LAP), it is essential to plan and manage the loan efficiently. Maximizing tax savings requires clarity on the loan purpose, careful use of funds, and maintaining proper documentation. Following best practices ensures you can claim the full benefits available under Sections 24(b) and 37(1).

Tips to Maximize Tax Savings

• Clearly Define Loan Purpose: Determine whether the LAP is for housing or business purposes, as tax benefits differ based on end-use.
• Use Funds Strictly for Eligible Purposes: Ensure the loan is spent only on approved expenses such as residential property purchase/renovation or business expansion.
• Maintain Proper Records: Keep receipts, invoices, and loan statements to support your claim during income tax filing.
• Consult a Tax Professional: Seek expert advice to accurately file returns and maximize deductions while remaining compliant with tax regulations.

Also Read: What is Loan to Value Ratio (LTV) in a Loan Against Property?

How to Claim Tax Benefits on Loan Against Property

Claiming tax benefits on a Loan Against Property (LAP) requires proper documentation and reporting in your income tax return. By following a structured approach, you can ensure compliance and maximize deductions under Sections 24(b) for residential purposes and 37(1) for business use.

Steps to Claim Tax Benefits on LAP

• Get an Interest Certificate from the Lender: Obtain an official statement showing the interest paid during the financial year.
• Maintain Proof of End-Use: Keep invoices, receipts, and bank statements to demonstrate that the loan was used for eligible purposes (housing or business).
• Report Deductions While Filing ITR:
  • Residential Property: Claim interest deduction under the “Income from House Property” section.
  • Business Purpose: Claim interest and associated charges under “Business/Professional Income” section.

After getting clarity on Loan Against Property eligibility and tax benefits on Loan Against Property and carefully considering these key aspects, you can make informed decisions regarding a loan against property. This approach ensures that you leverage the loan effectively while maximizing your tax benefits and minimizing financial risks.

Making wise choices in lender selection and loan usage will ultimately support your long-term financial goals.

To understand more about Loan Against Property and related information, refer to our Knowledge Centre.

Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions.

Also Read: Common Mistakes to Avoid While Borrowing LAP

FAQs

Q.1. What are the benefits of a Loan Against Property?

A. Since Loan Against Property is a secured type of loan, it usually comes at a low interest rate.

Q.2. How much ITR is required for a Loan Against Property?

A. When you apply for Loan Against Property, typically the last 2-3 years of Income Tax Returns (ITRs) are required.

Q.3. How can I save tax on my Loan Against Property?

A. You can claim a tax deduction on the interest amount paid on your Loan Against Property under section Section 24(b) and Section 37(1) depending upon the usage of funds.

Q.4. Can we claim a tax deduction on Loan Against Property?

A. You are eligible for tax deductions of up to INR 2 lakh if you use the Loan Against Property towards your home or business.

Q.5. Can I avail tax benefits for Loan Against Property if I have an ongoing Home Loan?

A. If you have availed tax benefits on an existing Home Loan, you can avail tax savings for Loan Against Property too. However, there are no tax benefits under Section 80C of the Income Tax Act.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements.
Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com