Detailed Guide to Loan Against Property Tax Benefits (2025-26)

A Loan Against Property (LAP) is a secured financial instrument where you pledge your residential or commercial property as collateral to unlock substantial liquidity. While many borrowers mistakenly conflate LAP with home loans, these are in fact distinct products with unique tax implications. As a regulated NBFC, Hero FinCorp emphasizes that while you can claim tax benefits on principal repayments under Section 80C for home loans, there is no loan against property tax under 80c benefit available for the principal component.

This is because a home loan is restricted to the acquisition or construction of a residential home, while funds from a loan against property can be used for diverse business or personal purposes. According to the latest RBI 'Fair Lending' guidelines, borrowers must ensure timely repayment, as CIBIL scores are now updated every 15 days, making credit behavior transparent to all lenders almost instantly. Proper financial planning and knowing the specific tax benefits on loan against property can help borrowers manage the loan effectively.

Can You Claim Tax Benefits on a Loan Against Property?

Yes, but with a critical caveat: unlike personal loans where benefits are often automatic, loans against property tax benefits are strictly tied to the documented end-usage of the borrowed funds.

• Principal Repayments: Generally, there is no loan against property tax exemption for the principal portion of your EMI.
• Interest Repayments: You can claim deductions on the interest component if the funds are used for business expansion or acquiring another residential property.

Key Tax Sections for Loan Against Property Tax Exemption

Section 37(1): Business Growth and Operations

If you are a business owner or a self-employed professional using LAP for business purposes such as purchasing machinery, scaling operations, or meeting working capital needs the interest paid is treated as a business expense.

• Deduction Scope: You can claim the interest, processing fees, and documentation charges as business expenditure under Section 37(1) of the Income Tax Act.
• Limit: There is no specific monetary cap on this deduction, provided the expenditure is "wholly and exclusively" for business.

Section 24(b): Financing a New Residential Property

Salaried individuals can claim a loan against property tax exemption under Section 24(b) if the loan is used to purchase, construct, or repair a new residential house.

• Self-Occupied Property (SOP): The deduction for interest is capped at ₹2 Lakh per annum.
• Let-Out Property: For a rented property, the entire interest can be claimed as a deduction, though any "loss from house property" is capped at ₹2 Lakh for set-off against other income heads.
• Timeline: For the ₹2 Lakh limit to apply, construction must be completed within 5 years from the end of the financial year in which the home construction loan was taken.

Scenarios Where No Tax Benefits Apply

It is vital to maintain a clear paper trail, as the following uses do not qualify for any tax benefits on loan against property:

• Personal milestones (weddings, vacations, travel).
• Medical emergencies or daily consumption.
• Children’s education expenses.
• Renovating the same property that has been pledged as collateral.

Tax Benefits on Top-up Loans

If you have an existing home loan and opt for a top-up, you can claim benefits only if the funds are used for house-related purposes.

• Repairs/Renovation: Capped at ₹30,000 within the overall Section 24(b) limit for self-occupied property.
• Construction/Purchase: Eligible for the full ₹2 Lakh interest deduction.

Documents Required to Claim Deductions (2025 Checklist)

To ensure your loan against property tax benefits are approved, keep these documents ready:

• Loan Sanction Letter: Clearly stating the purpose of the loan.
• Interest Certificate: Issued by your regulated NBFC at the end of the financial year.
• Proof of End-Use: Invoices, bank transfer records, or property purchase agreements.
• Completion Certificate: Required if claiming for new construction.

Frequently Asked Questions (FAQs)

Is Loan Against Property Eligible For Tax Exemption?

Not directly. While the loan itself isn't "tax-free," the interest paid can be claimed as a deduction under Section 37(1) for business or Section 24(b) for housing, provided you maintain proof of end-use.

Do Section 80c Deductions Cover Loans Against The Property?

No. Section 80C applies to the principal repayment of home loans used for acquiring a residential house. There are no loan against property tax benefits under 80c.

How Is Section 80c Beneficial?

Section 80C allows a deduction of up to ₹1.5 Lakh for specific investments and home loan principal repayments. However, this benefit does not extend to LAP, making it vital to plan your taxes accordingly.

Who Is Eligible To Claim Tax Deductions On Loans Against Property?

Business owners using funds for operational expenses or individuals using funds to acquire/construct a residential property can claim deductions on the interest paid, subject to documentation.

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