A home loan is a lengthy commitment and while you service it, you may consider taking a top-up loan to fund a series of personal needs like buying a car, spending on vacation, children’s education fee etc. It’s a viable option, given the ease with which you can raise the amount as well as low rate of interest than personal loan. Moreover, just like you can claim tax benefits for the principal and interest repayment on your home loan under Section 80C and 24 (b) respectively, did you know that you can also claim tax benefits on the top-up loan?
Claim Deductions Through Principal Repayment
The purpose for which you use the top-up loan defines the tax benefits that you can enjoy when it comes to principal repayment. This means if you use the funds to pay for repairs, renovations, or alterations to your existing property, you cannot claim any exemption on the principal repayment. On the other hand, if you use the funds from this loan to purchase or construct a new property, then you can claim tax benefits on principal repayment as per the guidelines stipulated in Section 80C.
Claim Deductions Through Interest Repayment
As for tax benefits on interest repayment, the cap rests at Rs. 2 lakh under Section 24(b) for both, the interest repayment you make on your home loan and on the top-up loan. However, if you use the top-up loan to make repairs or renovation, you will be able to claim a deduction of up to Rs.30,000, provided you live in the house yourself. For example, if you claim Rs.30,000 towards interest payment on your top-up loan, you can claim up to Rs.1.7 lakh as a deduction through interest payment on your home loan to bring the total to Rs.2 lakh.
On the other hand, there is no cap on total interest repayment deduction if you use the loan to fund construction or repair on a property you have let out. But on a yearly basis, it cannot exceed Rs.2 lakh. If it does, you can carry it forward to the next year, up to 8 years.
So, it’s easy to see that the tax benefits associated with a top-up loan depend on its end use and whether you’re using the home yourself or letting it out. By keeping these nuances in mind, you can get the extra funds you need and get a more generous tax-break.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.