A loan against property (LAP) helps individuals and business owners unlock the value of their owned residential, commercial, or industrial property. It can be used for various financial needs such as expanding a business, purchasing assets, or renovating a home. Apart from offering access to funds, this type of secured loan may also provide certain tax benefits if used for specific purposes. Understanding how these benefits work can help you plan your finances more effectively.
When do tax benefits apply when you take a loan against property?
Let’s understand the common scenarios where tax benefits may apply
Using the Loan for Business Purposes
When the loan is taken to meet business-related expenses such as working capital, operations, or services, the interest paid on the loan may be claimed as a business expense under Section 37(1) of the Income Tax Act. This may help reduce the taxable profits of the business. Other costs related to securing the loan, such as processing fees or legal charges, may also be considered as business expenses, provided they are directly connected to the business.
It is important to note that if the loan is used for acquiring capital assets like machinery or land, the interest cannot be claimed as a regular expense. Instead, it may be capitalised based on accounting treatment.
Using the Loan for Housing Needs
If the borrowed funds are used to purchase, construct, repair, or renovate a house, you may be eligible for deductions under Section 24 of the Income Tax Act.
For a self-occupied house, you may claim a deduction of up to ₹2 lakh per year on the interest paid. For a let-out or vacant property, there is no upper limit on the interest deduction under the same section, but overall limits for set-off against income may apply. Proper documentation, such as loan agreements, property ownership proof, and payment receipts, should be maintained to support the claim.
IDFC FIRST Bank offers flexible loan against property solutions that can be tailored for both business and housing requirements. You may explore their LAP options to check how well it fits your financial plans.
Affordable Housing and Additional Benefits
If the loan is taken to purchase an affordable residential property and the borrower meets specific criteria, Section 80EEA may allow an additional deduction of up to ₹1.5 lakh on the interest paid. This is available over and above the Section 24 limit. The benefit is subject to eligibility conditions related to property value, loan amount, and date of sanction.
What Is Not Covered?
The principal repayment on a property loan does not qualify for deduction under Section 80C. Similarly, if the loan is used for personal expenses like weddings, vacations, or lifestyle-related purchases, the interest on such a loan does not attract any tax benefit.
A Smart Way to Plan
To make the most of potential tax savings, borrowers should clearly define the purpose of the loan before applying. Using a separate account to track expenses from the loan can make documentation easier during tax filing. It is also useful to keep all loan-related receipts and statements. Using a loan against property calculator can give you a precise estimate of your EMI, total repayment amount, and interest cost over time. It helps in adjusting the tenure and loan amount based on your financial situation.
Conclusion
A loan against property can offer more than just financial support. If used thoughtfully and with the right documentation, it may also provide tax relief on the interest paid. Always consult a tax professional to understand how current rules apply to your situation and keep your loan usage aligned with the intended purpose.
Disclaimer: Tax laws are subject to change. Please consult a qualified tax advisor for the latest information specific to your case.