How Can You Avail Tax Benefits From Your Loan Against Property

For SME owners, the loan against property (LAP) has always been a popular financial tool to avail funds. This is because it allows you to avail a larger loan amount at a lower interest rate (when compared to other loans), and a much longer repayment term. Apart from this, there is another advantage to availing funds through loan against property.

Tax benefits!

Let us learn more about loan against property and the tax benefits you can enjoy.

MSME and LAP, India

MSME is a valuable sector within the Indian economy. Still, this sector is riddled with credit-related issues that hinder its growth. To help SMEs overcome this hurdle, financial institutions have launched various secured and unsecured business loans that meet both their long-term credit and working capital goals.

LAP is a secured business loan that is made available to the applicant against a collateral, which can be either a residential or commercial property. The loan amount is decided based on the applicant’s financials and the value of the collateral. There is no restriction on the end-use of the loan, so it can be used to purchase equipment, another property, hire skilled staff, invest in new project etc.

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The loan against property advantages are:

1. High loan amounts
2. Lower interest rate
3. Longer repayment tenures
4. Low EMI
5. No prepayment charges
6. No end-use restrictions
7. Tax benefits

As a growing SME, you would want to conserve your resources as much as possible and capital is the most important resource. In India, the tax laws permit you to gain certain tax benefits when you avail a loan against property. Let us look at the loan against property tax exemptions.

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Loan Against Property Tax Benefits for SME
 

1. Tax benefit on interest paid: Under Section 37 (1), you can avail tax benefits on the paid interest and other related charges and fees that you are paying against the loan against property. You will not be able to claim property tax deduction on the principal amount. The tax has to be filed under the business expenditures category in the Income Tax Act, 1961. Please note that this tax benefit cannot be availed if the loan amount is used to alter a mortgaged property and also if it is used for personal benefit such as travel, marriage, studies, etc.

1. Gain benefit from input tax credit: If you use your loan against property to purchase capital goods such as equipment, transport vehicles, etc. you will end up paying input tax credit (ITC), which has been introduced as part of Goods and Service Tax (GST). You can claim ITC and therefore, reduce the amount of tax that you need to pay. However, please note that if you have already put a claim for depreciation on the paid GST, then you will be unable to claim under ITC.

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Conclusion

Loan against property is a secured loan where the business owner can secure large funds by mortgaging his or her residential or commercial property. Tax exemptions and deductions are one of the many advantages of applying for a loan against property. You can claim tax benefits on the interest paid, but ensure that the loan has only been used for business purposes.