In case a taxpayer has availed a top-up home loan, tax benefits can also be claimed for the same. However, not many people are aware of this.
Taxpayers can avail of various tax benefits in case of a regular home loan. These include a deduction of Rs 2 lakh on interest payments and Rs 1.5 lakh on principal repayments for each financial year under the Income Tax Act, 1961. In case a taxpayer has availed a top-up home loan, tax benefits can also be claimed for the same. Here’s a brief on what a top-up home loan is and the tax benefits available to a taxpayer.
Top-up home loan
Top-up home loans are offered by banks to the existing home loan borrowers at a rate of interest which is lower than that charged on personal loans. Taxpayers can avail top-up home loans for a variety of purposes, including renovation or repairs of the house, education, children’s marriage etc.
Tax benefits on a top-up home loan
Taxpayers who avail of a top-up home loan for repairs or renovation of a house can claim a deduction for interest paid on such loans. Under the Act, the deduction that can be claimed is capped at a maximum of Rs 30,000 per financial year. For this purpose, the taxpayer has to retain the documents, receipts etc necessary to evidence that the top up loan has been taken for renovation or repairs of a house property.
In case of a general home loan for the purpose of construction of a house property, the Act allows taxpayers to claim a deduction up to Rs 2 lakh towards interest payments in a financial year. The interest paid on a top-up home loan would be allowed within the limit of Rs 2 lakh in a financial year. Taxpayers can understand this with the help of the illustration provided below:
For the financial year 2018-19, the interest paid by Mr A is Rs 35,000 on a top-up loan taken for the renovation of his residential house. Additionally, Mr A has paid Rs 1.8 lakh towards interest on home loan taken for construction of his house.
The above limit of Rs 2 lakh applies only in case of a self-occupied house.
In the case of a let-out house property, there is no maximum limit on the deduction that can be claimed towards interest payment in a financial year. However, in case of loss from house property (excess of deductions over income), a maximum of Rs 2 lakh can be set off against income under other heads. The amount of loss not set off can be carried forward for a period of 8 assessment years succeeding the assessment year.
With respect to repayment of the principal portion of a home loan, taxpayers can claim a deduction only in case of a home loan taken for construction or purchase of a house property. In case of a top-up loan taken for renovation or repairs of house property, no deduction can be claimed for principal repayments.
Hence, taxpayers will be eligible for deduction only on the interest payments made on top-up home loans. Taxpayers must keep the documentary evidence of such payments in case income tax authorities call for the production of proof for the claim of deduction.
Finally, a taxpayer will be eligible for deduction under the Act only in case of top-up loan taken for renovation or repairs of house property. No deduction is allowed under the Act in case the loan is used for education, children’s marriage etc.
(The author is Founder & CEO, ClearTax)