When it comes to buying a residential property in present times, no other option offers you better financial flexibility as compared to a Home Loan. Due to the increasing prices of residential real-estate across all major cities of India, buying your dream home on down-payment is not possible. Though, any lender would offer you a loan up to a certain LTV ratio (loan to value) only. The remaining margin money has to be provided by you along with the other expenses such as stamp duty, registration charges, etc. As a result, your savings are completely utilised, and you are left without a safety net for any unforeseen expenses.
In such a situation, there is one extremely useful credit option available to Home Loan customers, i.e., Home Loan Top Up.
What is a Home Loan Top Up?
Home loan Top Up is a loan offered by financial institutions to their customers who are currently running a Home Loan account with them. This facility is offered by extending the mortgage on your existing Home Loan account.
Although this loan is offered as a Top-Up to existing loan account it is, in fact, a separate loan with a different repayment schedule. For instance, if you have an active Citibank Home Loan account, you can avail Citibank top-up of up to Rs. 5 crore as a separate credit facility. Though, in many cases, lenders agree to merge these two accounts and offer you the option to pay a consolidated EMI. This allows you to make the repayment towards your loan account easily.
Home Loan Top Up is a popular option with individuals running a home loan as it offers various benefits over a new Personal Loan. High-value loan amounts, extended repayment tenor, freedom to use the money are some of the major draws of Home Loan top up facility. But the biggest benefit of a top up is the attractive interest rates. In most cases, the interest charged against a Home Loan top up is slightly higher than the prevailing Home Loan Interest Rates but significantly lower than Personal Loan interest rates. With such multiple benefits, top up offers you excellent financial flexibility while you are servicing your Home Loan EMIs.
Tax Benefits of Home Loan Top Up
While, you must be aware that Home Loans offer various tax benefits to the borrower, but you might not know that certain tax benefits are available on Home Loan Top Up as well. Though, in order to avail these tax benefits, you need to provide proper documents and receipts to prove that the borrowed money was used for construction, renovation, acquisition or repair of a residential property. Here are some important points that you must understand in order to avail income tax benefits against Home Loan top up.
- Deduction against interest payment: Individuals who have availed a Home Loan top up, can claim a deduction of up to Rs. 30,000, every year, against interest amount paid as a part of repayments. In order to claim this deduction, you need to provide documents to prove that the money has been used for renovation or construction of a residential property. This deduction is available under Section 24 of the Income Tax Act 1961, wherein provisions allow individuals to claim an income tax deduction of up to Rs. 2 Lakh on account of interest paid against Home Loan. This implies that the maximum deduction you can claim under this section is capped at Rs. 2 Lakh. It includes interest payments for Home Loan as well as Home Loan Top Up.
For instance, if your Home Loan interest payment in a financial year is Rs. 1.70 Lakh and Home Loan top up interest payment in the same year is Rs. 40,000, then you can claim a maximum deduction of Rs. 2 Lakh only. In case the interest payment for a Home Loan is Rs. 1.80 Lakh and for Home Loan Top Up is Rs. 10,000, you can claim deduction of Rs. 1.90 Lakh only.
- Limitation of deduction under Sec 24: The upper limit of Rs. 30,000 as a deduction for interest payment against a Home Loan Top Up is applicable in case of self-occupied houses only. If the borrowed money is used to carry out repairs and renovation on a rented out property, there is no upper limit on the deduction that can be claimed under Sec 24 of the Income Tax Act. Any interest payments over and above the limit of Rs. 2 Lakh, will have to be carried forward for a period of up to eight years.
- Deduction against principal repayment: In order to claim deductions under Sec 80C of the Income Tax Act for principal repayment, you need to provide documentary evidence that the Home Loan top up amount was used for construction or acquisition of a new residential property only. In such a scenario, the principal repayment amount would be eligible for claiming deduction under Sec 80C and Sec 24 (b) of the income tax, subject to respective maximum limits. But if the amount has been used for repair, renovation or any alteration in the property, then you cannot claim any deduction on the principal repayment.
- Documents required: You need to keep all the receipts, documents, bank statements handy to prove that the Home Loan Top Up amount has been used as per the provisions of the respective sections of the Income Tax Act to claim the tax deductions. If you lose these receipts or documents, your claim will be rejected by the Income Tax Department.
By using the facility for a Home Loan top up smartly, you can not only meet your financial requirements in a flexible manner but can also save significantly on your income tax liabilities.
