Loan against property is a common mortgage loan that both salaried individuals and self-employed businessmen avail to receive a large corpus of cash in times of need. While many times loan against property is interchangeably used with home loans, these are in fact very different loan types. You can claim tax benefits
on the principal repayments under section 80C
for home loans, but not for Loan against Property. This is because, a home loan can be used only for the purpose of buying a home or renovating one, while funds from a loan against property
can be used for business or personal purposes.
A loan against property can be easily availed since lenders feel secured — the property as collateral can be sold in case of defaults. Consequently, the interest rate charged is lower than a personal loan, and the terms of repayment are flexible and can be chosen by the borrower as per his need. Longer repayment options are also available that lower the EMI, reducing the burden of repayments.
Now coming back to tax benefits on loan against property, it’s important to know that tax benefits on this type of loan can be availed depending upon the end usage of the money borrowed.
Let us understand a little more.
While assessing your avenues, it must be noted that only the interest paid can be claimed for a benefit, and not the principal repayments. The claim for interest payments for mortgage loan tax benefits
can be made either under section 37 (1) for business purposes, or section 24 (b) for financing any other property.
- Exemption under Section 37(1)
If the amount is used for business purposes, the interest paid and the incidental charges such as processing fees and documentation charges can be claimed as business expenditure under Section 37(1) of the Income Tax Act.
- Exemption under Section 24 (b)
Salaried individuals can claim tax benefit under section 24 (b) of the Income Tax Act if the loan amount is used to finance another property. Such individuals are allowed to claim the interest under this section once the end use of the loan proceeding is established.
- No exemption in case of mortgage or for personal purposes
In case the loan proceedings are used for personal purposes like a child’s education or marriage, or for travel, paying medical bills and similar situations, then there is no tax exemption that can be claimed. Loan against property tax benefits
also cannot be availed if the funds are used to transform the mortgaged property.
- Exemption under 80C is not applicable
Principal repayments of a home loan might be allowed under this section, but there are no tax benefits for loan against property under 80C.
While the section’s benefits apply to a number of clauses, they cannot be utilised for loans against property even if the funds are used to purchase another house.
Life can throw curveballs at the most prepared of individuals. Whether it be for emergencies or rejuvenating one’s finances, a time may come where a large sum of money is required for business or personal reasons. With the pandemic leaving jobs and markets on unstable ground, there are many who are facing a cash crunch and are in immediate need of liquidity. Panic becomes a natural reaction to the crisis, and individuals end up selling assets like homes to fulfil their immediate needs for cash. Rather than making a rushed sale, it is wiser to mortgage it and secure the required funds.
Not only is it easy to get a loan against property (the interest charged is lower than a personal loan
!) but you also retain ownership of your house. Hold onto your assets at such times of need, and use them to your best advantage to make hay while the sun shines.