Plot loan tax benefits

Most of us dream of becoming a home owner. We dream of purchasing that perfect flat or apartment where we can live with our loved ones. And then there are those who find no thrill or joy in living in a regular sized flat that can only accommodate a few. They dream of living in a bungalow or a villa; one that they can construct on their own; with expansive bedrooms, multiple bathrooms, huge kitchens, and even a terrace. Such people find that investing in a plot and building a home on their own is a better option that moving into a readymade flat. What's more, such people can also take out a home loan to purchase a plot and construct their home on it. Before we talk about the tax benefits on plot purchase loan, let us understand what a home loan for plot is.

What is a home loan for plot?

A home loan for plot, also referred to as a land purchase loan is a type of home loan that allows you to purchase a piece of land or plot and construct a home on the plot as per your requirements. You can construct your home on your own or even wait for some time before commencing construction, depending up the loan clauses and time frame as specified by your lender. People intending to build farm houses, bungalows, or villas and can take out home loans for plots.

Just like any other loan, a plot loan is also repaid in equated monthly instalments with the lender charging an interest rate on the principal loan amount secured by the borrower. The borrower must repay the loan within the stipulated tenure, failing which the lender has the legal right to recover their investment by selling/auctioning off the property. With the ever-rising real estate rates, purchasing a plot of land is considered a great investment as the value of the land grows in the long term. It comes with a host of tax benefits too.

Plot loan tax benefit – how it works

Most people purchasing a plot often find themselves asking the question 'can we get tax benefit on plot loan?'' The answer to this question depends on what you intend to do with the plot.

If you intend to keep the piece of plot as it is, considering it as a long-term investment and hoping to sell it in the future, when its value increases, you will be disappointed to find out that there is no tax relief.

However, you can reap tax benefits if you take a plot loan and construct a house, bungalow, villa etc., on that plot. In that case, you can avail tax benefits on both portions of your loan; purchasing the plot and constructing the house on it.

Let's look at it with the help of an example.

Mr. Roy decides to purchase a plot of land for which he takes on a loan of ?500,000 from a housing finance company. Some months later, he decides to construct a bungalow on that plot for which he approaches his housing finance company once again, and takes another loan of ?300,000 to construct the bungalow. In this case, Mr Roy can combine his total loan amount i.e. ?800,000 to avail a tax benefit on the two loans.

Availing tax benefits on plot loan

Now let us understand plot loan tax benefits and when they can be availed.

Like we mentioned above, tax benefits can only be availed if you construct a house on the plot. Moreover, the tax deductions are only applicable in the year in which construction is completed. Upon completion of construction you can avail the follow tax benefits.

Tax benefit under Section 80C: As per Section 80C of the Income Tax Act, you can avail deduction on the principal repayment component of your plot loan up to a maximum of ?150,000 per annum. The principal amount refers to the actual loan amount borrowed from the lender and does not include the interest paid on the loan.

Note that the registration fees and the plot title transfer fees are also included in the maximum limit of ?150,000 so long as these amounts are paid in the year in which the construction is completed.

Plot loan tax benefit under Section 24: Once the construction is completed and you begin living in your newly constructed home, you can also get tax benefits on the interest portion of the loan. You are entitled to an annual deduction of ?200,000 on the interest component of the loan but only if you convert your plot loan into a regular home loan that allows this deduction. Once the construction is completed, you can convert the land loan into a home loan simply by submitting the certificates of completion and occupation to your lender.

Additional benefits

Now that you are aware of all the tax benefit on plot purchase loan, let us look at some additional benefits of this loan

Interest rate deduction: As per the national taxation code, if you purchase a plot to construct a home, you can avail plot loans at reduced interest rates. This can prove to be highly beneficial since interest disbursement is a huge part of settling you loan in the initial years, when you purchase the plot.

Reduced interest rates for pre-construction: While you can claim discounted interest rates when you begin construction at the start of a financial year, you are also eligible for pre-construction interest from that same year, which is provided in 5 instalments. The deduction can only be availed on a maximum of ?200,000 and only if you are residing on the property.