These days more and more people are opting to purchase plots and have their dream home built in it rather than go for an apartment or villa with the same design. It is a myth that plot loans do not offer as much tax benefits as home loans. Now that it is that time of the year when people go frantic – doing the eleventh-hour struggle to collect every one of those bills, receipts, deductions, income papers, bank statements and more, let us check out the perks of owning a house plot. Yes, tax time is looming ahead. But during the rush hour, you might overlook a huge opportunity to save tax that owning a plot or property can fetch you.
Below are a few tips to help you catalogue your deductions this year and may be utilize the same tips next year.
The national taxation code permits homeowners (or plot owners who bought the same with the intention to construct a house in it) a sizable reduction in the loan interest rate from their tax onuses. For most property owners, this is a great deal since interest disbursements can be the biggest part of your loan settlement in the initial years of buying a plot.
While discount in interest rates can be claimed at the beginning of the financial year in which the construction will be done, you may also claim pre-construction interest from the same year, which will be given to you in 5 easy installments. Nevertheless, you cannot have a deduction of more than INR 2 lacs if the property is occupied by you and your family.
The part of your EMI which pays towards the principal sum is entitled to be claimed under Section 80-C of the Indian Income Tax Act. You may recapitulate the outgo for the past year towards principal and file a claim for it. A sum of up to INR 1.5 lacs can be claimed this way.
In addition to the reduction permitted on principal settlement, that made as stamp duty and registration fees, are also allowed to be claimed as per the IT Act, Section 80-C. But these can be claimed only in the same year.
This section has been introduced to offer you a taxation benefit if you are a first time plot owners and if your property value meets certain criteria. This is applicable to loans sanctioned in the financial year of 2013. It cannot be more than INR 1 lakh though.
The initial year you purchase a plot (only for the purpose of building a house), you may claim the points, which is also known as origination charges on your plot loan. This is applicable whether you pay it or the previous owner. And since it is common to have origination charges of minimum one percent, you end up saving a lot.
Real estate property taxation disbursed on your primary dwelling and a holiday home are completely deductible for the purpose of income taxation.
Along with your plot loan interest , you can cut down the interest you disburse on a home equity loan, which lets you to transfer your credit card arrears to your home equity loan or pay out a lesser interest rate than the unbearably extortionate credit card rates of interest rates.
This one is a tad complex, but it can help you save a lot. If you had paid points for a refinance, that specific sum comes with a deduction in tax. But please keep in mind that you need to spread that money out over the entire tenure of the loan and only avail a credit for the altered sum every year.
Yes, you may claim a whopping reduction in the interest even for your second plot bought for the purpose of constructing a house there. Of course it comes with a certain limit on the plot value, but property taxes are easily deductible.
If you hire out your second house for less than a fortnight, the money thus made is all yours to keep. This might sound impractical, but quite a few property owners do this. With more and more tourists preferring furnished homes to hotels, it is rapidly becoming a popular trend.
One of the most common misconceptions of plot loan borrowers is that land loan and home loan are the same and, therefore, is eligible for tax deductions on both the principal and the interest component as that of the home loan. Plot loans do not qualify as home loans and do not offer any such benefits. One can only avail tax deductions if he/she is constructing the house in the same plot. In such cases, the tax deduction is only applicable to the loan amount for the purpose of construction. Additionally, the tax benefits can be claimed after the completion of construction as interest paid during the construction cannot be availed as Pre-EMI interest on plot loans. However, borrowers can consider converting their plot loan into a home loan after the construction is completed by submitting the certificate of completion or occupation to the bank.
One of the parameters that loan lenders consider before offering loans to applicants is the loan-to-value (LTV) ratio. LTV helps banks and non-banking financial companies (NBFCs) evaluate the risk of lending a loan. While applicants can avail up to 90% in the case of home loans, plot loans offer only 60%-70% of the property value. This will result in the applicant shelling out the remaining 30%-40% from his/her own pocket irrespective of the fact whether the applicant is buying the plot solely for investment purpose or building a house on it.
Type and Location of the Plot
In most cases, banks and NBFCs offer plots loans only for residential plots. Additionally, loan lenders don’t offer land loans for the purpose of purchasing an agricultural land or a plot in village regions. The plot one plans on buying must also lie with the corporation or municipal limits. However, one can always avail a home loan if he/she wishes to construct a house in that plot. Housing loans are free of the above mentioned constraints and are available on all kinds of plots irrespective of the type or location of the plot on which the house is to be constructed.
Plot loans have a relatively lower loan term when compared housing loans. While banks offer loan terms up to 30 years in the case of home loans, the maximum term offered on plot loan is only 15 years. Only in some rare cases do banks and NBFCs offer loan tenure up to 20 years on the land loans.
Most banks and financial institutions in the country do not grant plot loans to Non-Resident Indians easily considering the number of policies and regulations put in place by the government. Even if the banks are lending plot loans to NRIs, the rate of interest on these loans will be comparatively higher than that of the lands loans offered to resident Indians. Hence, NRIs are advised to go through extensive research before looking to buy a plot through a land loan.
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