23 NOVEMBER, 2022

Introduction - Is Plot Loan Eligible For Tax Exemption?

Banks or other loan providers offer plot loans to borrowers to help them purchase land on which they can build their dream houses.

If you don’t know whether the Land loan tax exemptions & benefits will be available to you, here you’ll get an answer to the question, it is reasonable to state that it depends on what the plot owner intends to do with the acquired property. It mainly fits into the following two categories:

  • If you bought the plot of land, intending to sell it afterward when its price shoots up, you might not get any tax exemptions. Since you are not trying to build any new structure on the land, you will not be eligible for any tax benefits on that land loan.
  • However, if you bought the land intending to build any structure, maybe your home, farmhouse, commercial properties, and more, then you will be eligible for tax exemptions on that land loan; however, it would be calculated only when the structure is built on that land. In other words, the plot loan tax benefitswill only be viable if you build any structure on the plot of land you purchased through a loan.

An Example

Palak is looking to buy land in Delhi NCR, which would cost her Rs 50,00,000. Since she cannot afford to complete the full payment at once, she decides to approach a bank for a land loan of the same amount. Now sometime later, she decided to construct a farmhouse on that land, which would cost her an additional Rs. 60,00,000, which again would be taken in the form of a loan with the same bank. After a year, her project is completed.

Palak currently owes a total of INR 110,00,000 in loans. Palak won't be eligible for any tax benefits in the land loan year on Rs. 50,00,000. She may, however, be able to deduct the total loan amount of INR 110 000 from his taxes once the building on the house site is finished.

Plot Loan Tax Advantages Decoded

With the above example, it might be more apparent now that you can get exemptions and land loan tax benefits only if you construct something over that land. And the benefit would be given only after you have a project completion certificate. However, once it is complete, you can take the following benefits. 

Section 80C Benefits

Section 80C, Income Tax Act of India, reviews various investments and expenses not subject to income tax. You are qualified for a deduction under this section for the part principal amount repayment alone. This permits a maximum plot loan tax exemption of INR 1,50,000 from your taxable income yearly.

Suppose, you have paid the taxes the same year the home's construction was finished. In that case, the title transfer costs for the plot & the registration costs are also included in the exempted amount.

Tax Benefit Per Section 24 For Plot Loan

Under Income Tax Act, Section 24, you may receive additional benefits on the interest portion of your plot loan once the building of your home is finished and you have moved in. To take these benefits, you need to convert your land loan to a home loan. It’s easy to do, as when your project is complete, you need to give the bank a certificate of completion to convert your land loan into a home loan. 

This clause's maximum deduction on the taxable earnings is INR 2,000,000. And if the homeowner and his family live in the newly built home, the amount is INR 1,50,000 if you missed filing your yearly returns and are doing them now. However, if the built home is given as a rental, the entire interest I forfeited.

Things to Know About Plot Loans

The other exemptions & benefits listed below are available if you qualify.

Interest Deduction

According to the Income Tax Act, if you take out a plot loan to buy a plot to build a house, you can do so at a lower interest rate. This is beneficial as you can avoid paying a large portion of the overall payments as high interest.

(LTV) Loan-to-Value

The LTV ratio is one factor that banks consider before extending loans to applicants. LTV aids banks & non-banking financial institutions (NBFCs) assess the loan's risk. While applicants can receive up to 90% of the property's value in home loans, only 60% to 70% is provided by plot loans.

Therefore, if the applicant purchases the plot for personal use or merely as an investment, they would be accountable for giving the rest 30% to 40% out of pocket.

Location And Type Of The Plot

Plot loans are typically exclusively available for residential plots from banks and NBFCs. Furthermore, lending providers do not provide loans to purchase agricultural grounds or plots in rural areas. The proposed purchase must also be inside the corporate or municipal boundaries.

However, a person who wants to build a house on that land may always get a home loan. Regardless of the location or type of plot where the house is to be built, housing loans are accessible on all plots and are not subject to the restrictions above.

Lower Interest Rate For Pre-Construction

If you build the house on the same plot for which you took the loan, you can get lower interest rates. The land loan tax exemptions would be applicable in the last fiscal year from which you are getting the construction loan. For example, if you built the house this year and opted for a construction loan, your pre-construction interest rate decrease would be applicable from the last year.

The decrease in interest will be provided to you in several installments. Nevertheless, the deduction is only available up to INR 2,00,000 and only when the homeowner or their dependents reside in the newly built property.

Conclusion

Although buying a property can be expensive, you can save thousands of rupees in taxes because of its tax advantages. So, maximize your tax savings by making tax preparations before purchasing your ideal home plot.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.