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While home loans are available to purchase existing or under-construction properties like flats or houses, you can use a plot loan to buy the land on which you want to build a home.
What is A Plot Loan?
A plot loan is a loan disbursed to an applicant by a lending institution to purchase a plot to construct a home. However, plot loans should not be confused with home loans.While home loans are available to purchase existing or under-construction properties like flats or houses, you can use a plot loan to buy the land on which you want to build a home.So, can you avail of tax benefits on plot loans? The answer lies in the way you intend to use the plot.Many people purchase plots as a long-term investment. They hold the purchased plot as it is for a considerable period, say a few years, and intend to sell it at a profit in future if and when the property prices appreciate. No tax benefits are available for plot loans taken for such purposes.However, you can avail of plot loan tax benefits if you intend to build a house or any other building on the plot purchased on a plot loan. In fact, you can get tax benefits on both the plot loan and the home loan taken to build a home on that plot.
How to Avail the Tax Benefits on a Plot Loan?
You can avail of plot loan tax benefits only if you construct a building on the plot for which you took the loan. Once the construction is complete, you can consider availing of the following tax benefits.
- Principal Repayment The loan amount borrowed from the lender is the principal amount. While the loan repayment of this principal amount can be availed for tax deductions under Section 80C, you can’t avail the tax benefits for the interest component of the loan.
- Maximum Limit You can avail of a maximum tax benefit of Rs 1,50,000 annually over your annual taxable income. The amount includes all types of investments and expenditures shown in this section.For instance, if you have shown an expense of Rs 50,000 over an insurance premium payment, then you can further avail of a tax benefit of up to Rs 1,00,000 on your loan repayment in that year.If you pay the registration fees and the plot title transfer fees in the same year the construction is completed, then you can get plot loan tax benefits under this section on such payments.
- Lower Interest Rates Your lender can sanction you a plot loan at a relatively low-interest rate if your intention for purchasing the plot is to build a house on it. Lower interest rates can benefit you in the long run by reducing the interest component of your total loan repayment.
- Lower Interest Rate for Pre-construction The borrower must pay a pre-construction interest when the house is under construction. However, once the construction is completed, the borrower can claim a pre-construction interest deduction over a series of instalments.You can avail of a maximum deduction of Rs 2 lakhs, and you can claim this deduction only if you reside in the house constructed in that particular plot.
- Section 80C A wide range of investments and expenses are exempted from income tax payments under Section 80C of the Income Tax Act of India. You can avail of tax exemptions under this section on your plot and home loan amount subject to the following conditions.
- Section 24 for Plot Loan You can avail of further tax benefits on the interest component of your plot loan under Section 24 of the Income Tax Act of India. However, you need to complete the construction and occupy the house before availing of the tax benefits.Once you occupy the house, you need to convert your plot loan into a home loan. The process of conversion is easy. You just need to submit a completion certificate and an occupation certificate to your lender with a formal application to convert your loan.Section 24 allows a maximum deduction of Rs 2 lakhs on the interest component of the home loan. However, the maximum deduction is Rs 1.5 lakhs for those who missed filing returns the previous year and are filing them now.
- Additional Benefits Apart from the tax benefits discussed above, you can have additional advantages on plot loans.
Thus, if you plan to buy a plot using a plot loan, then you should further plan how you intend to use the property and avail of income tax benefits accordingly.
FAQS - FREQUENTLY ASKED QUESTIONS
What are the conditions for a plot loan
To obtain a plot loan, an applicant needs to fulfill the following eligibility criteria:
The applicant needs to be an Indian resident. Some lenders also allow Non-Resident Indians (NRIs) and Person of Indian Origin (PIO) to borrow a plot loan but that needs to be checked with the lender.
Applicant needs to be in the age bracket of 21 to 70 years. The age range can also differ depending on the lender.
Applicant must be salaried with a certain specified regular income. Self-employed applicants must be in the business for a limited number of years.
Applicant must have a strong credit repayment history.
There are also some other factors that might affect the applicant’s plot loan application which are his income, his repayment capacity, his assets holdings, stability of his income and profession, etc. These are the general conditions for obtaining a plot loan. Some conditions can vary based on the lender’s conditions.
What are the conditions for a plot loan
The maximum loan that an applicant can get for funding the purchase of their plot is up to 70% of the plot value. In some cases, it can even go as high as 80% of the property value in some cases. In terms of the maximum loan amount, the maximum loan amount that one can get can be as high as Rs. 1 Crore to Rs. 1.5 Crore.
What is the difference between a plot loan and a home loan ?
One simple difference between a plot loan and a home loan is that the plot loan is taken for the purpose of purchasing a plot of land which is to be used for residential purposes while a home loan is taken for the purpose of purchasing an under-construction or a fully constructed house. Another difference between them is that the tenure of the repayment period of the loan is higher in home loans as compared to a plot loan. Also, the interest rate on a home loan is lower than the interest rate on a plot loan.
What is the interest rate on a plot loan ?
The interest rates on a plot loan depend on the credit score, credit history, and the repayment capacity of the borrower. But usually, the interest rate on a plot loan starts from 8.5% and can go as high as 13% as well. Do note that the change in the repo rate can bring a change in the interest rate range.
What is the interest rate on a plot loan ?
If you have taken a plot loan for an investment to be sold at a higher price later on in the future, sadly you won’t be able to save any taxes on it. However, if you have taken a plot for the purpose of construction of a residential property, you can claim deductions under various sections like Section 80C for principal repayment, and Section 24 for deduction towards interest paid.
What is the repayment period for a plot loan ?
The repayment period on a plot loan is usually up to 15 years and this applies to both salaried and self-employed applicants. The repayment period on a plot loan is lower than the repayment period that is allowed for housing loans.
Things to note before opting for a plot loan
Process of measuring an individual’s eligibility for loan differs from lender to lender.
Plot loans are accessible for purchases relating to residential plots mostly.
Pre-payment penalties don’t exist.
The interest rates for plot loans are higher compared to home loans.
Good credit score is important.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
