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 -

Tax Benefits under Section 24(b) for Loan Against Property

If your Loan Against Property is taken for buying, constructing, or renovating a residential house, you can claim deductions on the interest component of your EMIs:

• Self-occupied property: Deduction up to ₹2 lakh per year on interest.
• Let-out / deemed let-out property: Full interest amount is deductible, but total loss set-off is capped at ₹2 lakh per year.

Conditions to Claim Section 24(b):

• The loan should be used for purchase, construction, or renovation of a residential property.
• Property acquisition or construction must be completed within 5 years.
• Deduction is only for interest paid, not for the principal repayment.
• Pre-construction interest can be claimed in 5 equal installments after completion of construction.

Tax Benefits under Section 37(1) for Loan Against Property

If you take a Loan Against Property (LAP) to fund your business requirements, the interest and associated costs are treated as business expenditures under Section 37(1) of the Income Tax Act. This provision allows business owners to lower their taxable income and improve overall financial efficiency.

What Can Be Claimed Under Section 37(1)?

• Interest Paid: The interest portion of your LAP EMIs is fully deductible as a business expense when the loan is used for business purposes.
• Associated Costs: Processing fees, documentation charges, and other loan-related expenses are also deductible.
• No Upper Limit: Unlike Section 24(b), there is no cap on the amount of interest that can be claimed under Section 37(1).

Conditions & Compliance:

• The loan must be used strictly for business or professional purposes (e.g., expansion, working capital, equipment purchase).
• Maintain proper documentation and records (loan agreement, bank statements, invoices) as proof of business usage.

Example:

If you avail a Loan Against Property for ₹50 lakh and pay ₹5 lakh as annual interest, the entire ₹5 lakh (plus processing/documentation charges) can be claimed as a business deduction under Section 37(1).

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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 a Loan Against Property offers multiple tax benefits, it is important to note that not all uses of the loan qualify for tax deductions. Tax exemptions are allowed only when the loan is used for housing or business purposes. If the borrowed amount is used for personal or non-business expenses, you cannot claim any tax rebate or exemption.

Scenarios Where No Tax Exemption is Available:

• Weddings
• Travel or vacations
• Medical expenses
• Children’s education
• Debt consolidation or repayment of personal loans/credit cards

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

• When you use your Loan Against Property to purchase, construct, or renovate a residential house, the following benefits apply under Section 24(b):
• Purchase/Construction of New Property: Deduction of up to ₹2 lakh per year on interest paid.
• Renovation/Repair: Deduction allowed on the interest component for home improvements.
• Let-out or Deemed Let-out Property: No upper cap on interest deduction (entire interest amount can be claimed).

If the Loan is Used for Business Purposes

• When the LAP is utilized for business or professional needs, deductions fall under Section 37(1):
• Interest Paid: Fully deductible as a business expense, with no upper limit.
• Associated Costs: Processing and documentation charges are also deductible.
• Business Expansion/Renovation: Benefits also apply if the loan is used for purchasing, upgrading, or renovating a commercial property for business 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 benefit on mortgage loan in India depends not on the loan itself but on the end-use of the funds. To qualify for deductions, the Loan Against Property must be used strictly for housing-related expenses or business purposes. Using LAP for personal needs such as weddings, vacations, or education will not qualify for any income tax rebate on Loan Against Property.

1. General Rule

• End-use determines tax eligibility: Tax benefits on Loan Against Property are available only when the loan is used for residential housing or business needs.
• No deductions for personal use, such as weddings, travel, education, medical expenses, or debt repayment.
• No Section 80C benefit on the principal repayment of a Loan Against Property.

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

When LAP is used for residential property:

• Eligible Uses: Purchase, construction, renovation, or repair of a house.
• Completion Timeline: Property must be completed within 5 years from the end of the financial year in which the loan was taken.

Deduction Limits:

• Self-occupied property: Interest deduction up to ₹2 lakh/year (reduced to ₹30,000/year if construction exceeds 5 years).
• Let-out/deemed let-out property: Full interest deduction allowed, with no upper cap.
• Note: No deduction on principal repayment under Section 80C for LAP.

3. Eligibility under Section 37(1) - Business Purposes

When LAP is used for business or professional needs:

• Eligible Uses: Business expansion, purchase of equipment, working capital, renovation of commercial property.
• Deductible Expenses: Interest paid, processing fees, documentation charges.
• No Upper Limit: Entire interest and associated costs are deductible, provided proper records and proofs are maintained.

4. Ineligible Uses (No Tax Benefits)

No tax exemption is available if LAP funds are used for:

• Weddings or marriages
• Travel or vacations
• Medical expenses
• Children’s education
• Repayment of personal debt or credit card dues

How to Maximize Tax Savings

To make the most of the tax benefits on Loan Against Property, it’s important to plan wisely and stay compliant with tax regulations. The deductions you can claim depend on how the funds are used and the records you maintain. Following a structured approach will help you reduce taxable income and optimize your savings.

Tips to Maximize Your Tax Savings

• Clearly Define Loan Purpose: Decide upfront whether the LAP will be used for housing or business, as this determines eligibility under Section 24(b) or 37(1).
• Use Funds Strictly for Eligible Purposes: Ensure the loan amount is used only for housing-related expenses or business needs to qualify for deductions.
• Maintain Proper Records: Keep receipts, invoices, loan statements, and other documents to support your claims during tax filing.
• Consult a Tax Professional: Seek expert guidance to correctly file deductions and avoid errors, ensuring maximum benefits.

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

How to Claim Tax Benefits on Loan Against Property

To avail tax benefits on Loan Against Property, you need to follow proper documentation and reporting practices. The process differs depending on whether the loan is used for housing purposes or business needs. By ensuring the right proofs and filings, you can successfully claim your deductions and reduce your taxable income.

Steps to Claim Tax Benefits

• Get an Interest Certificate from the Lender: Obtain the yearly interest certificate to know the exact interest paid.
• Maintain Proof of End-Use: Keep invoices, receipts, and bank statements to establish that funds were used for eligible housing or business purposes.
• Report Deductions in ITR Filing:
  • For residential property usage → Claim under “Income from House Property”.
  • For business purposes → Claim under “Business/Professional Income”.

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