Plot Loan Tax Benefit: Understand How It Works

Tax Benefits of Buying a Plot and Building Your Own Home

Buying a plot and constructing your dream home is becoming increasingly popular, and contrary to common belief, a loan on plot tax benefits can be significant. Here’s how you can save on taxes with a plot loan:

Interest Deduction on Plot Loans

If you take a plot loan with the intention to build a house, you can claim tax deductions on the interest paid. This is especially helpful in the early years when interest payments are higher.

Pre-Construction Interest

Interest paid during the pre-construction period is eligible for deductions. This plot loan income tax benefit can be claimed in five equal installments starting from the year your home is completed, with a maximum limit of ₹2 lakh per year if you occupy the house.

Section 80C Benefits

The principal portion of your plot loan EMI, along with stamp duty and registration charges, qualifies for deductions under Section 80C, up to ₹1.5 lakh per year.

Section 24 Deductions

Once your plot loan is converted into a regular home loan after construction, you can claim up to ₹2 lakh under Section 24. This tax benefit for plot loans makes building your own home financially rewarding.

Overview of the Content 

What is a Plot Loan?

A plot loan, also known as a land loan, is offered by banks and Housing Finance Companies (HFCs) to help you purchase a plot of land for building your future home. Many people wonder about the plot loan income tax benefit—this depends on whether you plan to construct a house on the land within the specified time frame. Lenders often provide guidance on how to claim the tax benefit for plot loan if construction is intended.

You can apply for a plot loan by pledging existing collateral. These loans usually carry interest rates similar to or slightly higher than standard home loans, and lenders may finance up to 80% of the land’s value. To enjoy the home loan for plot tax benefit, most lenders require that construction be completed within a set period. Without construction plans, the loan is treated as a plain plot loan and does not qualify for any tax benefits.

How Does a Plot Loan Work?

The loan application is the first step in securing a plot loan. The bank evaluates your eligibility based on income, credit score, and other factors. After receiving the application, the property’s legal status, location, and market value are assessed. Typically, banks fund between 50% and 80% of the plot’s value.

Repayment usually spans 10–15 years. However, the tax benefit for plot loan is not automatically available, especially if the land remains undeveloped. Unlike regular home loans, you can claim the home loan for plot tax benefit only after starting construction. A pure plot loan without building a home does not qualify for any tax deductions under Indian income tax laws.

For example, if you purchase a plot for ₹10,00,000 and the bank finances 75% (₹7,50,000) at 8.5% interest over 15 years, the EMI will be around ₹7,364. But without construction, you cannot claim any tax benefit.

Some banks also offer combined loans for buying a plot and building a home. Opting for such a loan structure can help you enjoy the home loan for plot tax benefit, provided construction is completed within the time frame specified by tax regulations.

 How to Claim Tax Benefits for Plot Loan

Tax benefits on a loan on plot can only be claimed after construction is completed on the purchased land. Once the house is built, you can avail deductions on both the principal and interest as per the applicable tax rules, unlocking the plot loan income tax benefit.

Loan-to-Value (LTV) Ratio

Banks and NBFCs assess the loan-to-value ratio before approving a plot loan. While home loans can finance up to 90% of the property value, plot loans typically cover only 60%–70%. The remaining 30%–40% must be paid from your own funds, whether you are buying for investment or planning construction.

Type and Location of the Plot

Most lenders approve plot loans only for residential plots within municipal or corporation limits. Loans for agricultural land or plots in rural areas are usually not available. However, if you plan to construct a house, you can opt for a home loan, which is available for all plot types and locations, without such restrictions.

Loan Term

Plot loans generally have shorter tenures compared to home loans. While home loans can extend up to 30 years, plot loans are typically limited to 15 years, with only a few banks offering up to 20 years.

Plot Loans for NRIs

Due to government regulations, NRIs face restrictions in obtaining plot loans. Even when approved, interest rates for NRIs are higher than those for Indian residents. NRIs should carefully review terms before applying for a land loan to secure the best deal and potential tax benefits.

What are the Features of a Plot Loan?

Some important features of a plot loan are as follows:

1. Loan-to-Value Ratio (LTV)

The LTV ratio of a plot is the percentage of the property’s value that can be covered by the loan. Usually, lenders offer an LTV ratio of up to 80% for plot loans.

2. Interest Rate

Plot Loans are typically offered at floating interest rates. These rates are usually slightly higher than the rates of regular home loans.

3. Loan Tenure

Plot Loans are usually offered for a period ranging from 10 to 20 years.

4. Tax Benefits

There are certain tax advantages associated with plot loans.

5. Availability of Balance Transfer Facility

Some lenders provide a balance transfer option for plot loans.

6. Processing Fees and Prepayment Charges

These are extra costs that may be incurred when taking out a plot loan.

What is the Eligibility for a Plot Loan?

To get a loan for buying land, you need to meet some rules set by the bank or lender. The eligibility criteria are:

• Age: You should be between 18 and 65 years old. Some lenders, like Tata Capital, only give loans to people between 24 and 65 years old.

• Residency: You must be a resident of India to get the loan.

• Employment Status: You can get a loan whether you have a job or own a business. Some lenders might ask you to earn a minimum amount every month to qualify for a loan.

• Credit Score: It’s better if your credit score is 750 or more. This score shows that you have been good at paying back your loans so that the lender will trust you more.

• Repayment Capacity: The ability of a person to repay a loan is evaluated by looking at their earnings, age, education, number of people they support financially, income of their spouse, owned properties, debts, job stability, job history, and past savings. Your capacity to repay can impact your chances of getting a loan.

What are the Documents Required for a Plot Loan?

Applying for a plot loan requires you to provide certain papers to go through the loan approval procedure. The following is a list of often-needed documents:

• Application Form: A form filled with your personal and financial details.

• Age proof: Documents like your PAN Card or Passport.

• Residence proof: Documents like your passport, driver’s license, or phone bill.

• Education Qualifications: To showcase your educational qualifications.

• Salary Slips for the Last 3 Months: To verify your income.

• Form 16 for the Last 2 Years: A document from your employer detailing your salary and tax deductions.

• Bank Statements (Salary Account) for the Last 6 Months: To review your financial transactions.

• Processing Fee Cheque: A check for the loan processing fee, payable to the bank you are applying for the loan.

• A Photocopy of the Property’s Approved Plan and Title Documents: Documents related to the plot you plan to buy.

What is the Eligibility to Claim Plot Loan Tax Benefits?

Plot loan tax benefits in India depend on what you plan to do with the plot. If you buy a plot loan without construction plans, such as using it as a long-term investment, you won’t be eligible for any plot loan tax exemption.  But if you buy a plot to build a house or another structure, you may be entitled to a plot loan tax benefit. These benefits apply to the loan you took to buy the plot and the home loan you took to build on it.

For instance, if you take a loan to buy a plot for ₹30,00,000 and a year later, you take a home loan of ₹40,00,000 to build a house on that plot, you can’t claim any tax benefit in the first year. However, once the construction is complete, you can claim plot loan income tax benefit on the total loan amount of ₹70,00,000, as per plot loan tax benefits India regulations.

Remember that you can only claim plot loan tax benefits after a building has been completed. Under Section 24, you can claim a tax benefit on plot loan interest payments up to ₹2,00,000 per year. But if you don’t live in the house after it’s completed and rent it out instead, different rules may apply. So, answering the question “is plot loan eligible for tax exemption?”—it is, but only under specific conditions related to construction.

What are Additional Plot Loan Income Tax Benefits?

Owning a plot of land comes with certain tax benefits related to plot loans in many countries. These benefits are meant to promote property ownership and investment in real estate. Here are some additional tax advantages that can be gained from plot loans:   

1. Tax Benefits for Building a Home

You can get tax benefits if you plan to build a house on the plot you bought. These benefits apply to both the loan obtained to purchase the plot and the home loan taken to construct the house on the plot.

2. Tax Benefits After Completing Construction

According to Section 24 of the Income Tax Act, you can get extra benefits on the interest part of your plot loan once your house is built and you have moved in. You need to change your land loan to a home loan to get these benefits.

3. Lower Pre-Construction Interest Rate

The Income Tax Act 1961 provides extra tax benefits on plot purchase loans through a lower pre-construction interest rate. If a borrower starts building at the beginning of a fiscal year, they get a deduction of the pre-construction interest rate. This applies only if the loan was taken for both plot purchase and timely construction, making the is plot loan eligible for tax exemption condition more likely to be fulfilled.

How NoBroker Helps You

Buying a plot and building your dream home can be overwhelming, especially when it comes to plot loans, construction loans, and understanding tax benefits. NoBroker simplifies this process by helping you:

• Compare loan options from multiple banks and HFCs to find the best interest rates.

• Understand eligibility and documentation requirements for both plot and home loans.

• Plan tax savings effectively, ensuring you can claim deductions under Section 80C and Section 24.

• Get expert guidance on application, disbursement, and post-construction loan conversion.

With NoBroker, you can access all the information in one place, save time, and make informed decisions without paying extra broker fees.

Conclusion:

Plot loans offer significant plot loan tax benefits, a major financial advantage for those planning to buy property. Individuals can get personalized guidance to make the most of these tax benefits on plot loan deductions by seeking advice from a financial advisor or tax expert. If you are considering investing in a plot of land and want to explore the best options while minimizing your taxes, you might look at No Broker.

No Broker is revolutionizing the real estate sector by offering a comprehensive platform that eliminates the need for intermediaries, ensuring a seamless and cost-effective property transaction process. With an extensive database of properties, users can effortlessly find homes that suit their needs without dealing with traditional brokers. The services provided by No Broker extend beyond just property listings, offering tools and resources for users to directly interact with property owners, negotiate deals, and finalize transactions.