Loan Against Property Tax Benefits​

Loan Against Property (LAP) tax benefits are primarily determined by the use of the borrowed money. An LAP is not explicitly deductible for tax purposes, unlike a home loan, where tax deduction is allowed, as the security of the loan is in the nature of property. If the LAP is used for the purchase, construction, repair, or renovation of property, then the interest paid on such a loan may be claimed as a deduction under applicable income-tax laws. The deduction would depend on the purpose of the loan, the property, and the tax regime. Hence, borrowers should ensure that they satisfy the conditions for claiming any deduction.

Key Takeaways: 

1. Tax benefits on LAP would depend on the purpose for which the loan is taken.
2. Proper documents such as loan statements and interest certificates need to be submitted to claim deductions.
3. Under the new regime, Section 24(b) is unavailable for self-occupied homes but remains available for let-out properties, subject to the ₹2 lakh loss set-off limit.
4. An LAP cannot be treated the same way as a housing loan for tax benefits.

What Does 'Loan Against Property' Mean?

A Loan Against Property (LAP) refers to a secured form of loan wherein the borrower pledges or offers his/her existing property as the security against the loan amount. The LAP value is decided by considering the property’s current market value along with the eligibility criteria set by your lender. An LAP can be taken for multiple purposes depending upon the usage of funds, but it is important to understand that the tax implications differ depending upon the purpose. A home loan, on the other hand, is taken specifically for the purpose of buying, building, or renovating a residential property.

What Are The Tax Benefits Of Loan Against Property Under The Income Tax Act?

A loan against property (LAP) can provide you with tax benefits if the borrowed money is used for specific purposes. Applicable deductions depend on whether the money is used for buying/repairing a house or for business expenses.

ITR: When you file your income tax return (ITR), you need to include the statement of your loan along with the certificate of interest and payment details. You can claim a deduction under the relevant section as mentioned above against the interest paid.

LAP tax benefits depend on the purpose of borrowing. Maintain all the relevant documents and claim the applicable deductions when you file your taxes. A tax expert can help you determine the applicable deductions.

What Is The Eligibility Criteria For Tax Benefits On LAP?

Tax benefits on a loan against property are subject to certain conditions, including the purpose of the borrowed money and other factors related to the loan, property, and documents.

1. The loan must be taken from a recognised financial institution or lender in India.
2. Tax benefits are generally available on interest and not on the principal amount.
3. The borrowed amount should be used for specific purposes like business expansion, buying or constructing a new home, or undertaking renovations.
4. If the money has been used for professional or business-related activities, the interest paid on such a loan might be claimed as a business expense, according to the applicable tax rules.
5. In case the borrowed money is used for personal needs, one could claim the interest deduction under section 24(b) if the money is used for the purchase, construction, repairs, or renovations of a qualifying house property.

The above-mentioned factors could help a borrower to understand if the interest on a loan against property could be claimed as a tax deduction. One should always evaluate the applicable tax rules before claiming any deduction.

When Does LAP Not Offer Loan Exemptions?

A loan against property has the advantage of flexibility as far as the usage of the money withdrawn against the mortgage is concerned. However, it is pertinent to note that not all kinds of uses of the loan proceeds can offer the borrower tax benefits.

The following are some examples of non-qualifying uses of a mortgage loan:

1. Application to housing needs: If the money withdrawn from the mortgage is applied toward the borrower’s housing needs, there is no provision for the interest paid on such a loan to be claimed as a housing expense deduction.
2. Application to business expenses: In case the loan is taken for genuine business expenses, the interest paid may be deductible under the Income Tax Act, subject to the applicable conditions.
3. Non-qualifying expenses: Expenses for such items as education, marriage, travel, and medical bills, etc., cannot be classified as housing expenses.

Since the taxability of a given item depends upon its applicability under the Income-tax Act, the borrower should check the relevant sections of the Income-tax Act and maintain documents in support of any deduction claimed.

Mistakes To Be Avoided While Claiming Tax Benefits On Loan Against Property

Claiming tax benefits on a loan against property should be done cautiously, as it involves eligibility criteria and documents. To avoid mistakes, know the errors that must be kept away from a tax claim on a loan against property.