Top-up loan: Tax Benefit on Top-Up Home Loan

While purchasing a property, there are several unplanned expenses that can crop up in due course. Such expenses can often be addressed conveniently through a top-up loan offered by financial institutions during home loan refinancing.

HFCs allow prospective borrowers to borrow avail an amount over their existing home loans by opting for a balance transfer. The maximum top-up home loan amount one can avail depends on one’s eligibility and the cap set by the lender.

The interest rate charged on these loans is usually the same as that of the existing home loan. A top-up amount comes without end-use restrictions, allowing borrowers to utilise it to fund any number of requirements. The home top-up loan process of application is quite simple and straightforward. Apart from this, it also comes with a few notable benefits.

According to the Income Tax Act, 1961, taxpayers can avail various benefits for each financial year when they avail a home loan. This includes an exemption of up to Rs.2 lakh on the interest payment under Section 24(b) and Rs.1.5 lakh on principal payment under Section 80C.

Here’s a brief discussion about the tax benefits available to a tax-payer on availing a top up loan.

Tax benefits on top-up loans

It is to be kept in mind that for the financial year 2020–21, individuals do not need to pay taxes if their income does not exceed Rs.5 lakh under both the new and old tax regimes.

However, individuals above this income slab, before availing a home loan top-up, should know the tax benefits they can avail from it.

• Under the Income Tax Act, a borrower can claim a maximum amount of Rs.30,000 for interest payment made towards settling a top-up loan availed to finance the purchase of a self-occupied house. This is how aspiring home buyers can benefit from a top-up loan when it comes to tax payment.
• Taxpayers can claim a deduction only if the top-up home loan amount is utilised to construct, acquire or renovate a property. No deduction will be allowed if the amount is utilised for some other financial purpose.
• Borrowers need to possess certain receipts and relevant documents to establish proof that the top-up home loan amount has been used to repair the residential property.

These exemptions, availed over and above the tax benefits and advantages offered by home loans today, can effectively help to reduce the repayment burden in the long run.

Crucial factors to remember

To avail the tax exemptions applicable on home loans and top-up loans, individuals will need to meet a few requisite parameters. These are discussed below —

• The stamp duty of the house should not exceed the amount of Rs.45 lakh.
• Borrowers are not eligible to claim tax exemption under Section 80EE if they have not availed the home loan between FY 2016–17.

Nonetheless, tax benefit should not be the only factor to consider while availing a home loan or a top-up against it.

It is advised to utilise a home loan eligibility calculator before applying for the home loan to gauge the amount one can easily borrow.

Further, knowing about the amount of home loan interest rate and choosing a flexible tenor will help individuals plan their finances and repayment accordingly.

Trusted HFCs also extend pre-approved offers on several financial products to make the loan application process less cumbersome and flexible. Usually, these offers are available on financial products like loans against property, home loans and more. One can check their own pre-approved offer by providing essential details like name and contact number.

By looking into these factors, individuals can optimise their borrowing experience not only in terms of tax payments but also by way of eliminating hassles.