A Home Loan can be a saviour when buying a house. This is because property prices are increasing significantly. Sometimes, the loan proceeds cannot meet some extra house costs. These additional expenses may be connected to house improvements, registration fees, home renovations, property taxes, etc. In these circumstances, a top-up Home Loan can be a great option.
Top-up Home Loans are one of the easiest methods to borrow money with less verification and documentation. Additionally, it offers flexibility and better features along with tax benefits on top-up Home Loans.
What is a Top-Up Home Loan?
Many people want to own a house. But the rise in property prices can cause a delay in their goal. So they opt for a Home Loan to finance their purchase. To fund extra expenses related to the house, financial institutions offer their existing Home Loan borrowers top-up funds known as top-up Home Loans.
Some financial institutions clearly specify the purpose of the top-up loan, like repairs and renovations. Others even allow the borrowers to take a top-up loan to fund their children’s education, marriage, vacation, etc.
Generally, Housing Loans are long-term financial obligations, and timely loan repayment requires discipline. Therefore, proper repayment planning is essential before making a Home Loan application. A Home Loan calculator can help loan seekers to make an informed decision regarding EMIs and the right fit for tenure.
Tax Benefits on Top-Up Home Loans
There is good news for individuals who have obtained a Home Loan for the purpose of purchasing or building a residential property – they could qualify for specific deductions. Here is a list of deductions.
- Principal repayment of up to Rs. 1.5 lakh u/s 80C.
- Home Loan interest payments up to Rs. 2 lakh u/s 24(B).
However, one must remember that tax benefits under top-up Home Loans can only be availed on one condition.
If this is the case, the principal repayments and interest payments will be eligible for deduction u/s 80C and 24 (b), respectively. One must note that there is a limit on the interest payment allowed as a deduction.
In the case of top-up Home Loans, the maximum deduction allowed to a taxpayer on interest repayment is Rs 30,000. More importantly, the interest deductions will be under the overall limit of Rs 2 lakh available for Home Loans. So the total deduction for interest repayment under both home and top-up Home Loans cannot be more than Rs 2 lakh.
Further, the limit of Rs 30,000 applies to a self-occupied house only. If the loan is taken for repairs and renovations on a let-out property, there are no such limitations.
In the case of principal repayments, if the top-up loan is taken for the purpose of construction or purchase of a new property, then only the principal repayments can be availed as a deduction of up to Rs 1.5 lakh u/s 80C.
Conditions for Claiming Top-Up Home Loan Tax Benefits
To avail of tax benefits on a top-up Home Loan, taxpayers must fulfil certain conditions.
- The loan is taken by them to buy, construct or repair a house.
- Taxpayers must also maintain receipts and other necessary documentation related to the loan to avail of the tax benefits.
- If they use the loan proceeds for children’s education, marriage, vacation or any other purpose except for those mentioned above, they will not be able to claim any deductions.
A top-up Home Loan is an additional debt. This is a very important factor that borrowers must consider. A top-up Home Loan only for tax purposes is not beneficial. Further, before taking a top-up loan, consider the repayment capacity, home renovation budget, financial requirements, and financial situation to repay the loan comfortably. Finally, pay back the loan amount on time to avoid any hassle in the future and avoid any penalty.