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Tax Benefits on Home Loan Top-Ups

What is a Top-Up Loan?

Top-Up Loan is the additional loan which the borrower can avail to manage emergency fund requirement. This emergency fund requirement may be for various reasons such as renovation of home, extension of home, repairs or maintenance or for other expenses such as vacation, children’s education, marriage etc. Personal Loan can be an alternative to the Top-Up Loan but it is more expensive as compared to Top-Up Loans. Currently, Personal Loans are offered at 10.75% to 11.5% range whereas Top-Up Loans are much cheaper as compared to Personal Loans as they are Secured Loans. Also, Personal Loans are offered for max 5 years tenure whereas Top-Up Loans are offered for a tenure which is equal to unexpired period of the original Home Loan. Due to higher tenure, the EMI on the Top-Up Loans tend to be much lesser than the Personal Loans.

Tax Benefits or Deductions

There are several valuable Tax benefits available on Home Loans and Home Loan Top-Ups. These include deduction of up to Rs.1.5 Lacs on the principal repayment under section 80C and up to Rs.2 Lacs on the interest paid under section 24 of the Income Tax Act.

Tax benefits from Top-Up Home Loans can only be availed only if the funds are used for acquisition, construction, renovation or repair of residential properties and the called upon borrower has to prove the same with documentary evidence. If the funds are used for any other purpose, then the deduction can’t be availed. The maximum deduction available for interest paid on Top-Up loan is Rs. 30,000/- and the overall deduction (interest on HL and Top-Up Loan) can’t exceed the limit of Rs.2 Lacs.

The Tax benefit on principal repayment is only available if the funds are used to purchase new property or construction. In this case, deductions under section 80C and 24(B) are applicable, respectively. If the fund is used for renovations, or alterations, or repairs of the property, no deduction can be claimed on the principal repayment u/s 80C.

Conclusion

Top-Up Home Loans can be a good alternative to Personal Loans as the Top-Up Loan interest rates are much lesser. Also if one is aware of the Tax planning aspects with respect to Home Loan and Top-Up Loan then these options become even more attractive.

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