Finance & Taxation
Tax Benefits on Loan Against Property: Deductions and Exemptions
22 February 2025
Introduction
Pledging residential or commercial property as collateral has long been a popular method of securing funds. Many individuals consider this option during financial hardships. Instead of selling your property and giving up ownership, you can use it as security for a loan from a financial institution.
A loan against property (LAP) refers to borrowing funds by mortgaging a residential or commercial property. This is a secured loan, typically with a repayment tenure of up to 20 years. One of the significant advantages of a loan against property is its eligibility for tax benefits.
Tax Deductions Under Section 24(B)
Salaried individuals can claim tax deductions under this provision. If the loan amount is utilized to purchase a residential property, the borrower can claim a deduction of up to ₹2,00,000 on the interest paid. However, as per Section 24(B) of the Income Tax Act, taxpayers must demonstrate a direct connection between the borrowed amount and its intended use.
It is important to note that this deduction applies only to the interest portion of the EMI, not to the principal repayment. Additionally, individuals who use the loan for renovating the mortgaged property are not eligible for this benefit. Similarly, this tax deduction does not apply if the funds are used for personal expenses such as vacations, education, or weddings.
Tax Exemptions Under Section 37(1)
Unlike Section 24(B), which focuses on income, Section 37(1) of the Income Tax Act covers expenditures. Tax benefits on a loan against property can be claimed for interest payments and associated charges incurred for business-related purposes. Borrowers can include expenses such as processing fees and interest payments in their financial statements, provided these costs are for business operations rather than personal expenses or capital investments.
It is essential to understand that a loan against property is not eligible for tax exemptions, irrespective of whether the loan is taken for personal or business purposes. However, home loans qualify for tax exemptions since they are used for purchasing residential properties. Similarly, businesses can claim tax benefits if the loan is used to acquire commercial assets, up to a predefined limit.
Final Thoughts
To claim tax benefits on a loan against property, borrowers must maintain proper documentation and receipts related to expenses and interest payments. Deductions can only be availed if the loan amount is used for renovation, repairs, construction, or acquiring a property.
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