Tax Benefits On A Loan Against Property

A loan against property can be your saving grace if you have to fulfill bigger expenses, like funding higher education, renovating a property, or taking care of existing liabilities. When you are looking out for a more reliable financial source to fulfill your expenses during tough times, a loan against property can be useful. Although it can be a big responsibility to take on, there are several benefits to it. This article will shed light on how a loan against property enables borrowers to claim certain tax benefits, under what circumstances borrowers can claim these benefits, and how to avail them without a lot of hassles.

What Is A Loan Against Property?

An LAP or a loan against property is a type of secured loan where the borrower pledges their property with banks or private lenders to obtain higher loan amounts so they can fulfill their financial obligations. This is specially beneficial given the soaring property prices. A loan against property can be your saving grace on a rainy day. Most public-sector banks offer loan against property at interest rates that range between 9% to 15%. These loans come with a substantially long repayment period, which gives the borrower enough time to find funds.

Features Of Loan Against Property

Various Properties Can Be Pledged

Banks lend loans on different property types – self occupied properties, rented spaces, empty land owned by borrowers, individual villas or houses, and commercial properties.

Longer repayment period

The repayment period for loan against property may vary depending on the loan amount and the type of property being pledged. On an average, this period can vary anywhere from 3 years to 20 years. However, it depends on the lender’s policies. This allows borrowers enough time to put their finances together for the loan payoff.

Higher Loan Amount at Affordable Interest Rates

With a loan against property, you are assured of getting higher loan amounts. While government-run banks offer 65% to 70% of the property value as loan, private lenders offer 40% to 60% of the property value as a loan.

The interest rates for a loan against property are in the range of 8.5% to 18% depending on the lender’s policies. Interest rates are decided based on RBI’s ‘repo rates’ – base rates on which banks and private lenders impose additional percentage from their end.

The above features make loan against property an excellent financial option. Let’s take a look at some of the points borrowers must consider before applying for a loan against property.

LAP – Important Points To Keep In Mind

Applying for a loan against property is a huge liability to take on. One must consider several factors to decide whether they are taking a step in the right direction. Here are some crucial points to go through before accepting a loan offer.

Understand What Can Be Pledged

It is important to have a fair knowledge of the types of properties that can be pledged for an LAP. Government-run banks require borrowers to possess documentation for every single activity concerning their property’s upkeep. Hence, remember to update your knowledge about property laws and keep the relevant documents handy while applying for an LAP (Loan Against Property).

One may apply for a property loan if one is the lawful owner of a space that either they occupy or is rented out by someone else. The loan process will not, in any way, affect those occupying the property. One may borrow a loan by pledging an independent house, flat, rented spaces, and commercial properties, depending on the financial requirement at the time of applying.

Although commercial spaces can fetch a fairly higher loan amount than residential spaces, banks and private lenders lean more towards residential property owners, as they believe residential plot/flat owners will always ensure prompt repayment so they can retrieve their pledged property.

Understanding LTV (Loan To Value) Ratio

Loan-to-Value ratio indicates the percentage of a property’s value given by banks as loan. Most government-run banks offer 65% of the total property value as loan while private lenders tend to offer upto 75% of the property value as loan. This parameter highly depends on the lender’s policies and is subject to variations.

Eligibility Criteria

People assume that if they legally own property that is free of any legal or financial limitations, they can apply for a loan against property. However, this is not the case. The government has set certain guidelines which potential borrowers must follow so they can borrow loan against property.

The individual must be an Indian citizen and should have collateral property in India.
Minimum age limit: 25 years, Maximum age limit: 70 years.
Must have a consistent income source.
Credit Score of 700 or higher.

Tax Benefits Available on a Loan Against Property

Tax benefit is a key differentiating factor between a normal secured loan and a loan against property. The government has offered certain income tax benefits to borrowers of a loan against property. These benefits are only applicable in select situations. Let’s take a quick look at some of them.

Tax Exemptions For Loan Against Property

There are two separate tax sections under which applicants can claim exemptions – Sections 24(B) and Section 37(1). Both sections have different provisions and conditions for tax payers.

Section 24(B):

Under this section, those who have borrowed a loan against property are entitled to claim exemptions of up to ₹ 2 Lakhs, provided that applicants buy another property using the loan amount. To avail of this tax benefit, the loan must have been taken for the purpose of purchase, construction or repair of another property. If the loan is being used to buy or construct another property, borrowers must claim this exemption within 5 years of borrowing the loan.

Section 37(1):

If you have taken loan to meet business expenses, you can claim rebates on processing fees, documentation fee and even interest paid on the borrowed loan. For this, one may submit their business expense receipts, however, it is important to note that to claim this expense, one must use the borrowed loan to meet their business expenses only and no other purpose.

How Much Can You Claim As Tax Benefit On Loan Against Property

The benefits mentioned above are applicable only in specific circumstances. You can claim tax benefits when you have borrowed a loan against property for the purpose of buying another property, renovating an existing structure or constructing a new one. Under such circumstances, one may apply for benefits under Section 24.

Borrowers may claim a rebate of upto ₹2 Lakhs for a self-occupied property.

Those who have pledged a rental property (i.e a property owned by the borrower but has been sublet) can claim the entire interest paid on the property loan.

Documents Needed to Claim Loan Against Property Tax Deductions

Loan borrowers are expected to submit different types of paperwork depending on the type of employment. If you are new to the process, the following is a generic list of documents you must submit in order to apply for a loan against property.

Identity Proof (any one of the following):

PAN card
Passport
Driving License
Voter’s ID
Employee ID
Bank passbook
Ration card

Address Proof (any one of the following):

Ration card
Telephone bill
Electricity bill
Rent agreement
Passport
Driving License
Bank passbook or statement

Proof Of Ownership of Residence

Property documents
Maintenance bill
Electricity bill
Copies of all Property Documents
Sales deed/copy of Agreement
Share certificate (if society formed)
Latest maintenance bill

Income Proof

If you are a salaried employee, you will be required to submit your three most recent salary slips.

If you are self employed, you will be required to submit proof of your business income in the form of GST receipts and other relevant documents proving that your sole source of income is through the business.

Why Credit Score Matters In Loan Against Property Process?

Credit score is integral to a smooth loan process. When taking out a loan against property, one of the primary factors most banks check is the applicant’s credit history and creditworthiness. This gives them an understanding of the individual’s capacity to repay their loan against property.

It is important to keep track of your credit score even if you do not plan to take out a loan. This process helps you gain a better understanding of your credit profile.

Credit bureaus like TransUnion CIBIL, Experian, etc. have simplified the credit score checking process.

Another option is to resort to credit score checking apps like Oolka, Cred, etc. which employ AI powered algorithms to provide you with accurate credit scores and optimised reports.

Conclusion

Owning property is one of the best investments one can make. A loan against property is your safety cover during a rainy day. While a loan may seem like a major responsibility to take on, it has several benefits. Before you apply for a loan against property, it is essential to understand the tax benefits and how you can claim them, to make it a win-win endeavour.

FAQs

Can self-employed property owners apply for a loan against property?

Yes. Self-employed individuals are eligible to apply for a loan and avail certain tax benefits.

Is A Good CIBIL Score Necessary For a Hassle-free Loan Process?

Yes, despite your economic background, it is important to note that a good CIBIL score is of utmost importance while applying for a loan against property. Banks and private lenders go through your credit records to understand your creditworthiness and take an account of the same to determine how reliable you are.