Acquiring a plot of land is a prudent strategy for wealth accumulation. However, the required investment funds may be insufficient. In such situations, loans become a necessity. Several banks provide a specialised loan, known as a plot loan, to address this specific need. A plot loan is accompanied by tax benefits to help you save money on the loan and optimise your wealth. This article provides comprehensive insights into plot loans and the associated tax benefits, empowering you to make informed decisions.
What is a plot loan?
A plot loan, also known as a land purchase loan, is a specialised form of home loan for acquiring a piece of land or plot and constructing a home. This loan provides flexibility, allowing borrowers to either build their homes immediately or wait for a specified period, depending on the terms and conditions outlined by the lender. Individuals with plans for constructing farmhouses, villas or bungalows can utilise plot loans.
Similar to other loans, a plot loan involves repayment through equated monthly instalments (EMIs), with the lender applying an interest rate on the principal loan amount secured by the borrower. Repayment must occur within the agreed-upon tenure. Failure to do so grants the lender the legal right to recover their investment by selling or auctioning off the property. Given the continual increase in real estate values, investing in a plot of land is often considered a lucrative venture as the land’s value tends to appreciate over the long term. Plot loans come with tax benefits, enhancing the financial advantages associated with this form of investment.
Plot loan tax benefits: Eligibility
In India, the tax benefits associated with plot loans depend on the intended use of the plot. If you purchase a plot as a long-term investment without construction plans, you cannot avail of any tax benefits. However, tax benefits can be claimed if the plot is acquired to build a house or any other structure. These benefits extend to both the loan taken to purchase the plot and the subsequent home loan secured for construction.
For example, if you take a loan of Rs 30 lakh to buy a plot and a year later obtain a home loan of Rs 40 lakh for constructing a house on the same plot, you will not be eligible for tax benefits in the initial year. However, once the construction is completed, you can claim tax benefits on the entire loan amount of Rs 70 lakh.
The tax benefits on a plot loan can only be claimed after the construction is completed. As per Section 24, individuals can claim a tax advantage on interest payments of up to Rs 2 lakh annually. However, this deduction is not applicable if the property is not occupied after completion and is rented out.
How to claim plot loan tax benefits?
To avail of tax exemption on land purchase, it is essential to understand the deductions provided under the Income Tax Act. These deductions encompass the principal repayment and the interest payment.
Deduction on principal repayment under Section 80C
Under Section 80C of the Income Tax Act, you can claim a deduction for the principal amount repaid on your land loan. The maximum annual deduction is Rs 1.5 lakh, which includes the principal repayment. This limit encompasses other eligible investments and expenses under Section 80C. Stamp duty and registration fees are included in this section, however, only in the year of purchase. If the plot is jointly owned and the loan is in the name of both owners, each owner can individually claim a deduction under Section 80C. However, the total deduction claimed by both owners should not exceed the total principal repaid.
Deduction on interest payment under Section 24
The deduction on interest payment for a plot loan falls under Section 24 of the Income Tax Act. This benefit is applicable only if you construct a house on the plot. You can claim this deduction once the construction is complete and the plot loan is converted into a home loan. For a self-occupied property, the maximum annual deduction amount is Rs 2 lakh. However, if the property is let out, there is no upper limit on the plot loan tax exemption. A crucial condition for availing this benefit is that the construction should be completed within five years of the conclusion of the fiscal year in which the loan was obtained. Failure to meet this condition reduces the deduction amount to Rs 30,000.
Tax benefits for constructing a house on the purchased plot
Tax benefits are applicable if you plan to build a house on the purchased plot. These benefits extend to both the loan for acquiring the plot and the home loan for constructing the house on that plot.
Tax benefits after completing construction
As per Section 24 of the Income Tax Act, additional benefits are available on the interest of your plot loan once the construction is completed and you have moved in. To qualify for these benefits, it is necessary to convert your plot loan into a home loan.
Lower pre-construction interest rate
The Income Tax Act of 1961 provides supplementary tax benefits for plot purchase loans through a lower pre-construction interest rate. If a borrower initiates the construction at the beginning of a fiscal year, they become eligible for a deduction based on the pre-construction interest rate.
FAQs
How does a plot loan function?
A plot loan is offered by banks or lenders to individuals aspiring to purchase land for the construction of homes.
What are the tax advantages of acquiring land?
Upon purchasing land, you qualify for an annual tax exemption of up to Rs 1.5 lakh. Additionally, when paid in the same year as the home construction, title transfer fees for the plot and registration fees are included in the exempted limit.
Is a plot loan covered under Section 80C?
Yes, plot loans fall within the purview of Section 80C.
Is the interest on a land loan eligible for tax deduction?
No, the interest rate on land is not deductible under the land tax.
How can I avail tax exemption on a plot loan?
Tax benefits on a plot loan are attainable when you construct on the plot. Eligibility arises after the completion of the construction process.
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