Tax Benefits on Plot Loan
Did you know that tax benefits can be availed after the construction of the house as the interest repaid during construction cannot be claimed as Pre-EMI interest on the plot loan? Read more the various ways you can save tax on your plot loan below.
Tax Benefits of Buying a Plot and Building Your Own Home
More people today are choosing to buy plots and build custom homes instead of buying ready-made apartments or villas. There’s a common myth that plot loans don't offer as many tax benefits as home loans—but that's not true.
As tax season approaches, don’t miss out on potential savings. Here’s how owning a plot can actually help you save on taxes:
1. Interest Deduction on Plot Loans
If you buy a plot with the intention of building a house, you can claim tax deductions on the interest you pay on the loan. This is especially useful in the early years when interest payments are usually higher.
2. Pre-Construction Interest
You can also claim deductions on the interest paid during the pre-construction period. This amount is allowed in five equal installments starting from the year the construction is completed. However, if you're living in the house, the total deduction is capped at ₹2 lakh per year.
3. Section 80C Benefits
The part of your loan EMI that goes towards the principal repayment can be claimed under Section 80C of the Income Tax Act—up to ₹1.5 lakh per year. Stamp duty and registration charges can also be claimed under this section, but only in the year they are paid.
4. Section 24 Deductions
You can claim up to ₹2 lakh as a deduction under Section 24 once you convert your plot loan into a regular home loan after construction is complete. This is a straightforward process and unlocks additional tax benefits.
How to claim tax benefits for plot loan
One should keep in mind that tax benefits can be claimed on plot loans only after the construction of a building has been completed on the said plot. Once the construction is completed, you can claim the deductions on the loan as per the sections mentioned above.
Loan-to-Value (LTV) Ratio
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.
Loan Term
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.
Plot loans for Non-Resident Indians (NRIs)
Given the plethora of restrictions and regulations enacted by the government, most banks and financial institutions in the country do not readily grant plot loans to non-resident Indians. Even if banks grant plot loans to NRIs, the interest rates on these loans will be greater than those on lands loans offered to Indian residents. As a result, NRIs should conduct considerable study before applying for a land loan to purchase a plot.
FAQs on Tax Benefits on Plot Loan
- Can I claim deductions on the principal amount paid towards my plot loan?
Yes, the portion of your Equated Monthly Installment (EMI) that goes towards repaying the principal sum is eligible for deductions under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs.
- What is the Loan-to-Value (LTV) ratio for plot loans?
While home loans may offer up to 90% of the property value, plot loans typically provide only 60%-70% of the plot's value, requiring the applicant to fund the remaining amount from personal funds.
- Are plot loans available for Non-Resident Indians (NRIs)?
Plot loans for NRIs may be subject to stricter regulations and higher interest rates. It's advisable for NRIs to conduct thorough research before applying for a plot loan.
- When can I claim tax benefits on my plot loan?
Tax benefits can be claimed only after the completion of construction on the plot. Once the construction is finished, deductions can be claimed as per the relevant sections of the Income Tax Act.
- What are some tax benefits of buying a land?
Upon buying a land, you will be eligible for a tax exemption of up to Rs.1,50,000 per year. If paid in the year in which the home is constructed, the title transfer fees for the plot and the registration fees are also included in the exempted limit.
- What about deductions for pre-construction interest on a plot loan?
Pre-construction interest on plot loans can be claimed in easy instalments, with a maximum deduction of Rs. 2 lakh if you and your family occupy the property.
- How can I claim deductions on interest payments for my plot loan?
Interest payments on plot loans are eligible for deductions under Section 24 of the Income Tax Act, up to Rs. 2 lakh, provided the loan is converted to a regular home loan after construction.
- Does plot loan falls under Section 80C?
Yes, plot loans fall under the Section 80C.
- Is loan interest on land tax deductible?
No, the interest rate is not deductible under the land tax.
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