Tax Benefit on Top Up Loan

A typical home loan offers tax benefits such as a deduction of up to Rs. 1.5 lakh on principal repayment under section 80C of the Income Tax Act and a deduction of up to Rs. 2 lakhs on interest payments in a financial year under section 24 of the Income Tax Act. You can also claim a tax benefit if you have taken out a home loan balance transfer. But first, let’s define what a top-up loan is.

What is a Top-Up Home Loan?

A home loan top-up is an additional loan amount that a borrower can get on top of their existing home loan. The maximum loan amount and term permitted by the top-up loan product vary per lender. Customers can get a top-up loan from their existing lender or transfer their money to a new lender via a balance transfer.
Taking up a top-up loan is preferable to taking out a personal loan because it has a lower interest rate and requires less documentation. As a top-up loan, up to 70% of the property’s market value can be obtained.

How do Tax Benefits on Top-Up Home Loans Work?

• Providing proper documentation for your top-up loan’s usage in acquiring, building, repairing, or renovating your residential property can help you with tax savings.
• A regular home loan allows for a maximum deduction of Rs 2 lakh on interest payments. Top-up loans dedicated to repairs and alterations qualify for a maximum tax deduction of Rs 30,000.
• Only a self-occupied house is subject to the Rs 30,000 limit. There is no limit to the amount of deduction that can be claimed if the repairs and renovations were done on a rented property.
• The amount of tax relief on principal repayment is determined by how the funds are used. If the funds are used to particularly, build or buy a new home, the principal and interest will be eligible for tax deductions under sections 80C and 24(b) of the Internal Revenue Code, respectively. 
• Also, you cannot claim a deduction on principal repayment of your loan if you use the funds for repairs or renovations.

In the long run, a top-up loan on a home loan with a tax exemption can help to reduce the repayment load.

Tax Benefits on Top-Up Home Loans

Let’s take a closer look at the tax incentives available under these parts of the Income Tax Act.

Section 80C of the Income Tax Act

The highest allowable deduction is Rs. 1.5 lakhs. The primary amount is the subject of this section, which gives tax benefits. This provision of the Income Tax Act allows an individual to deduct income tax paid to repay their principal loan amount. This provision allows you to claim deductions for amounts paid towards fixed deposits, senior citizen savings plans, Public Provident Fund (PPF), national saving certificates, and other authorized deductions. However, note that exceeding the limit of Rs. 1.5 lakhs disqualifies you from claiming any tax deduction on the exceeding amount. Only if the construction is finished may you claim a tax reduction. This clause does not provide for tax benefits for properties that are still under development.

So, if the assessee has received tax benefits in the form of deductions, the property cannot be transferred. Section 80(5) of the Income Tax Act imposes this provision. Property owners must wait at least 5 years from the end of the assessor’s control year before transferring these properties.

Section 24 of the Income Tax Act

The tax benefit on the interest paid on a home loan is available under this clause. A maximum deduction of Rs. 2 lakhs is available to the borrower. If the home was not purchased for self-occupation, however, there is no maximum limit. The property must be completed within 5 years; otherwise, the deduction amount will be decreased from Rs. 2 lakhs to Rs. 30,000.

80EE of the Income Tax Act

First-time home buyers benefit from Section 80EE of the Income Tax Act, which allows for a tax deduction on the interest paid on a house loan. For first-time house loan borrowers who make interest payments on their home loan, an additional amount of Rs. 50,000 is allowed. This additional leverage of Rs. 50,000 will be in addition to the deductions of Rs. 2 lahks under Section 24 and Rs. 1.5 lakh under Section 80C of the Income Tax Act, respectively.

Conditions for Claiming Tax Benefit on Top-Up Home Loan:

To verify that the top-up loan was used for the acquisition, building, renovation, or repair of the house or residential property, you must have receipts and other necessary documentation. If the funds were used for renovation, repair, or alteration of the residential property, no deduction can be claimed on the main payments.

Dos and Don’ts While Claiming the Deduction

Even if you have missed the actual payment, you can claim a deduction for the interest portion of the payment. This is because section 24 of Income Tax Act refers to interest payments on housing loans as “paid or payable.” However, store the documents in a safe place in case tax officials require verification.

Second, only if the loan amount is utilized for repairs, renewals, alterations, or the purchase/construction of a property will the deduction (either on interest payments/principal repayment or both) be considered eligible. There will be no deduction if the top-up loan is used for anything else, such as children’s education or a family vacation.

Finally, records and documents must be kept to establish that the loan was taken to repair or renovate a residential property.

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Also read:

Home Loan Top Up

Tax Benefits on Second Home Loan

Section 24 of Income Tax Act: Check Deduction for Home Owners

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Encumbrance Certificate: Why it is Important for Home Loan?

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