What are the Tax Benefits of Home Loan Top Up?
A typical home loan includes tax benefits like a deduction of up to Rs. 1.5 lakh on principal repayment under section 80C of the Income Tax Act and a maximum deductibility of Rs. 2 lakh on interest payments in a financial year as per section twenty-four of the Income Tax Act. You also can get a tax benefit if you make a home loan balance transfer. Whether a home loan top-up is eligible for tax exemption depends on how the borrowed funds are utilized. In general, the principal repayment of a home loan is eligible for a deduction under Section 80C of the Income Tax Act.
In this blog, we'll discuss the home loan top-up eligible for tax exemption along with tax benefits of home loan top-up.
What is a Top-Up Home Loan?
A home loan top-up is an extra loan the borrower can add to their existing home loan. The maximum loan amount and term under the top-up loan product varies by lender. Customers may obtain a top up loan from their present lender or transfer funds to a new lender via a balance transfer.
A top-up loan has a lower interest rate and requires less documentation than a personal loan. As a top-up loan, up to 70% of the property's market value can be obtained.
Tax benefits on top-up home loans: How do they work?
- Proper documentation of how your top-up loan was used to purchase, build, repair or renovate your residential property can save you taxes.
- A regular home loan allows maximum interest deduction of Rs 2 lakh. Top-up loans for repairs and alterations are deductible to the maximum Rs 30,000.
- Only a self-occupied house falls under the Rs 30,000 limit. The deduction for repairs and renovations on a rented property has no limit.
- How much tax relief is provided on principal repayment depends on how the funds are used. In case the funds are utilized to specifically construct or even buy a new home, the principal and interest will be deductible under section 80C along with 24 (b) of the Internal Revenue Code.
- You also can not deduct principal repayment on your loan if you use the money for repairs or renovations.
Over time, a home top up loan is eligible for tax exemption.
Top-Up Home Loan Tax Benefits
Consider the Tax benefits under these parts of the Income tax Act for housing loans.
The Income Tax Act, section 80C
Maximum deduction allowed is Rs. This comes to 1.5 lakhs. The subject of this section, which provides tax benefits, is the primary amount. This provision of the income tax Act enables the person to deduct Income Tax paid to pay back a principal loan amount. This provision allows you to deduct amounts paid toward fixed deposits, senior citizen savings plans, Public Provident Fund (PPF), national saving certificates, or other authorized deductions. But note that going over the limit of Rs. 1.5 lakhs bars you from claiming any tax deduction on the excess amount. Only when construction is finished can you receive a tax reduction. This clause doesn't provide tax benefits on properties that are currently under development.
So if the assessee has received tax benefits in the form of deductions then the property can not be transferred. This provision is imposed under Section 80 (5) of the Income Tax Act. The property owners should wait more than 5 years following the conclusion of the assessor's control year prior to transferring these properties.
The Income Tax Act, section 24
This clause provides the tax benefit on interest paid on a home loan. A max deduction of Rs. The borrower has 2 lakhs available. There's no upper limit in the event that the house wasn't bought for self-occupation. The property must be finished within 5 years; Otherwise, deduction amount will be reduced from Rs. 2 lakhs - to Rs. 30,000 of them.
80EE of the Income Tax Act
First time home buyers can make use of Section 80EE of the Income Tax Act to deduct the interest on a house loan. For first-time house loan borrowers who make interest payments on home loans, the additional Rs. It can be 50,000. This further leverage of Rs. 50,000 will be on top of the deductions of Rs. 2 lakhs under Section 24 and Rs. 1.5 lakh each under Section 80C of the Income Tax Act.
Conditions to Claim Tax Benefit on Top-Up Home Loan
Receipts along with other documentation show that the top up loan was utilized to purchase, construct, renovate or repair the home or commercial property. In case money was used to renovate, restore or alter the residential property, no deduction is allowed on the main payments.
Dos and Don'ts When Claiming the Deduction
Even in case you missed the actual payment, you can deduct the interest on that payment. This is because section 24 of the Income Tax Act calls interest payments on housing loans "paid or payable." But keep the documents safe in case tax officials need to verify them.
Second, only if the loan amount is used for repairs, renewals, alterations or the purchase / construction of a property is the deduction (on interest payments / principal repayment or both) eligible. Any deduction if the top-up loan is used for anything else like children's education or a family vacation will not occur.
Finally, records and documents should prove the loan was made to repair or renovate a residential property.
Conclusion
It is essential to maintain documentation and proof of end-use of funds when claiming tax benefits on a top-up loan. Consult with a tax advisor or financial expert to understand the specific tax implications and eligibility criteria for deducting the interest paid on a top-up loan against your taxable income.