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Tax Benefit On Top-Up Home Loans

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A usual home loan provides tax benefits such as deduction of up to Rs. 1.5 lakh on principal repayment as per section 80C of the Income Tax Act and up to Rs. 2 lakh in respect of interest payment in a financial year under section 24. Also, if you have taken a top-up on your home loan, you can claim tax benefit. But before we will understand what a top-up loan is.

 
Tax Benefit On Top-Up Home Loans

What are top-up home loans?

 

A top-up loan is a financial product offered by banks, housing finance company, leading financial institutions and so on which enables the customers to borrow a fixed sum over and above the existing home loan which they have already borrowed from the lender. These top-up loans are offered by banks to its existing home loan customers.The maximum amount one can get through top-up loan mainly depends on the lender. And the rate of interest on these loans is usually lower than what the customer would have to shell out in the case of personal loans. Some of the financial institutions extend such a loan to be exclusively used for renovation or repair of the house while others also disburse it so as to be used for any purpose such as for funding a vacation, education, daughter's marriage etc.

Tax benefits on top-up home loans

However, here, it should be remembered that the limit of Rs 30,000 is available for a detached house only. In the case where repairs and renovations have been carried out on a rented property, in this case, there is no limit on the deduction. However, the maximum compensation that can be claimed during a fiscal year against other heads of income is 2 lakh rupees. Any payment of interest beyond Rs 2 lakh during a financial year must be deferred up to eight years

While claiming a deduction from the principal repayment, there is one condition to remember.

The tax benefit on the return of capital depends on the use of the funds. If the funds are used for the construction or purchase of a new property, the principal, as well as the interest, will be eligible for the deduction subject to the limits set out in Articles 80C and 24 b), respectively, however, if the funds are used for repairs, renovation or modification of the property, no deduction can be claimed from the reimbursement of the capital.

Illustration: Suppose you pay an interest of Rs. 32,000 on a top-up home loan then on this amount you are allowed a maximum deduction of Rs. 30,000. Further, if you have made any interest payment on a regular home loan that will be deducted from the balance Rs 1.7 lakh (Rs 2 lakh minus Rs 30,000). So, the total deduction on interest payment on home and top-up loan in a financial year is Rs. 2 lakh.

Also, the deduction limit of Rs. 30,000 for interest payment on top-up loan is available for a self-occupied house only. And in case renovation and repair is undertaken at a let-out property, there is no limit on the deduction that can be claimed. Any interest payment over and above Rs 2 lakh in a financial year will have to be carried forward up to eight years

Pre-requisites for claiming tax benefit on top-up home loan:

You need to possess receipts and other relevant documents to prove that top-up loan has been used towards acquisition, construction or renovation and repair of the house or residential premise.

On the principal repayment no deduction can be claimed in case the funds have been used towards renovation, repair or alteration of the residential property.

Do's and Don'ts of Claiming the Deduction:

You can claim a deduction on the interest portion of the payment, even if you missed the actual payment. Article 24 mentions that the words "paid or payable" mean the payment of interest on housing loans. However, remember to keep the documents safe in case the tax authorities ask you for proof.

Second, the deduction (either on interest payments / principal repayment or both) will only be considered eligible if the loan amount is used for repair, renewal, modification or purchase/construction of a house. If the complementary loan is used for other purposes such as child-rearing, family vacations, etc., no deduction will be available.

Finally, keep receipts and documents proving that the loan taken out is used for repair/renovation of the residential building.

Goodreturns.in

Read more about: home loan deduction interest
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