Owning a plot of land is a smart way to accumulate wealth. But sometimes, you may not have enough money to invest. In such a scenario, resorting to loans is the only way to meet the shortcoming amount. Several banks thus offer a specific loan called the plot loan. Moreover, a plot loan comes with the plot loan tax benefit to ensure that you can save money on the loan while maximising your wealth.
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But before taking any loan, you must have a complete idea about the same. Luckily, this article will do this job for you. This article will thoroughly everything about the plat loan and the plot loan tax benefit so that you can make wise decisions. So, let’s get started.
Read: 45 Lakh Home Loan EMI With Calculator And Interest Rates 2024
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What is a Plot Loan?
A plot loan is a kind of loan offered by banks and Housing Financial Companies (HFCs). It is also referred to as a land loan. This loan is intended to assist you in purchasing a plot of land on which you want to construct a house in the future.
You can apply for this loan by pledging collateral that you already hold. Plot loans usually have interest rates that are either somewhat higher or the same as standard house loans. Lenders often finance up to 80% of the land’s worth. It is important to note that if the loan is approved, they frequently demand that you finish building the home within a specific amount of time.
How Does a Plot Loan Work?
The loan application is the first step in the process; it establishes your eligibility based on several factors, including your income and credit score. The bank evaluates the property’s legal status, price, location, and other factors after receiving the application. The bank disburses the loan after a thorough evaluation; typically, this funds between 50% and 80% of the plot’s market worth.
The loan is then repaid by the borrower over a ten-to-fifteen-year period. Tax benefits associated with land purchases are not applicable to EMI payments made on land loans for plot purchases, in contrast to housing loans. Some lenders also provide composite loans, which cover both the land acquisition and the house building.
Consider purchasing a plot of land for ₹10,00,000. The bank offers a loan for 75% of the land’s cost, totalling ₹7,50,000. With an interest rate of 8.5% and a loan period of 15 years, your monthly instalment (EMI) is about ₹7,364. However, unlike a house loan, you cannot claim tax benefits on this EMI.
Aside from loans for land acquisition, several banks provide combined loans for buying land and building a house on it. This is a flexible loan that can help you acquire a residential plot and finance the construction of a dwelling on it.
Read: SBI Home Insurance – Financial Security for Your Home in India
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.
Read: Home Loan Refinancing: Features, Benefits and Process
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 licence, 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.
Read: IOB Home Loan EMI Calculator
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 as a long-term investment with no plans to build anything on it, you can’t claim any tax benefits. But you can get tax benefits if you buy a plot to build a house or other building. 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 a tax benefit on the total loan amount of ₹70,00,000.
Remember that you can only claim tax benefits on a plot loan after a building has been completed. Under Section 24, you can claim a tax advantage on interest payments up to ₹2,00,000 per year. But you can’tclaim this deduction if you don’t live in the house after it’s completed and rent it out instead.
How to Avail Tax Benefits on Plot Loan?
Availing of tax exemption on land purchase involves understanding the deductions available under the Income Tax Act. These deductions can be claimed on both the principal repayment and the loan’s interest payment.
1. Deduction on Principal Repayment
Section 80C of the Income Tax Act allows you to claim a deduction for the principal amount of your land loan. The maximum annual deduction amount is ₹1.5 lakh, which includes the principal repayment. This limit also includes other investments and expenses eligible under Section 80C. In addition to the loan repayment, stamp duty and registration fees are included under this section, but only in the year of purchase.
If the plot is jointly owned and the loan is also in the name of both owners, each owner can claim a deduction under Section 80C. However, the total deduction claimed by both owners should not exceed the principal repaid.
2. Deduction on Interest Payment
The deduction on interest payment of a plot loan is covered under Section 24 of the Income Tax Act. However, it’s important to note that this benefit is only available if you construct a house on the plot. You can claim this deduction once the construction is complete and the plot loan is converted into a home loan.
The maximum annual deduction amount for a self-occupied property is ₹2 lakh. But, if you let out the property, there is no upper limit on the plot loan tax exemption. One condition to avail of this benefit is that the construction of the house should be fulfilled 5 years after the conclusion of the fiscal year during which the loan was obtained. If not, the deduction amount gets reduced to ₹30,000.
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.
Plot loans offer significant tax benefits, a major financial advantage for those planning to buy property. Individuals can get personalised guidance to make the most of these tax 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 minimising your taxes, you might look at NoBroker.
NoBroker is revolutionising 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 NoBroker extend beyond just property listings, offering tools and resources for users to directly interact with property owners, negotiate deals, and finalise transactions.
Frequently Asked Questions
1. Which is better, a plot loan or a personal loan?
A plot loan is usually more advantageous than a personal loan due to its lower interest rate, larger loan amount, and longer loan tenure. But a personal loan might be better if you need money quickly.
2. How does a plot loan work?
A bank or lender provides a plot loan to individuals who want to buy land to build their dream home.
3. Is land loan tax saving?
You can only get tax benefits on a plot loan if you build a house on the plot.
4. What is Section 24 of the Income Tax Act for plot loans?
Section 24 of the Income Tax Act allows you to claim tax breaks of up to ₹2 lakh, but you must convert the plot loan into a conventional house loan to qualify.
5. How do I get tax exemption on a plot loan?
You can get tax benefits on a plot loan only if you build on the plot and only after the construction is complete.
