All About Plot Loan Tax Benefits

Everything know about Plot Loan Tax Benefits

Purchasing a plot of land is a significant investment that can serve various purposes, such as constructing a home or as a long-term asset. While Home Loans offer several tax-saving opportunities, understanding the plot loan tax benefit is essential for land buyers in India.

Though the benefits differ slightly from Home Loans, they can significantly reduce your financial burden if utilised effectively. This guide explains everything you need to know about plot loan tax exemption and how to make the most of it.

What are Plot Loans?

Financial institutions offer plot loans to help individuals purchase land. Unlike Home Loans, which are strictly for ready-built or under-construction properties, plot loans can only be used to buy land, usually for residential or investment purposes.

Key Features of Plot Loans

1. Purpose-Specific Use:
   Plot loans are generally offered for buying non-agricultural land within municipal or corporation limits.
2. Loan-to-Value Ratio (LTV):
   The LTV ratio for plot loans is usually 70%–75%, meaning borrowers must arrange 25%–30% of the cost as a down payment.
3. Higher Interest Rates:
   Plot loans often have slightly higher interest rates compared to Home Loans.
4. Limited Tax Benefits:
   Tax exemptions are available only when the plot is purchased with the intent to construct a house within a specified period.

These features make plot loans an excellent option for individuals planning to build a home or make a strategic land investment.

Plot Loan Tax Benefits: Know How It Works

Tax benefits on plot loans in India are slightly different from those on Home Loans. Here’s a detailed explanation:

1. Tax Deductions Under Section 24(b):
   • Interest paid on the loan is eligible for deduction up to ₹ 2 Lakh annually, provided the plot is used for constructing a house.
   • To claim this deduction, the construction must be completed within five years from the end of the financial year in which the loan was taken.
2. No Tax Benefit on Principal Repayment:
   • Unlike Home Loans, principal repayment on plot loans does not qualify for tax benefits under Section 80C unless the property is constructed on the plot.
3. Pre-Construction Interest Deduction:
   • Interest paid during the construction period can be claimed as a deduction in five equal instalments starting from the year of completion.

Understanding how plot loan income tax benefit works can help borrowers plan their finances better and maximise savings.

How to Claim Tax Benefits on a Plot Loan

Claiming tax benefits on plot loans requires following a systematic process. Here’s a step-by-step guide:

1. Complete the Construction:
   • Ensure the construction of the house is completed within five years from the financial year in which the loan was taken.
2. Obtain Necessary Documents:
   • Loan sanction letter.
   • EMI statements detailing interest paid.
   • Completion certificate or proof of construction.
3. Include Details in ITR:
   • While filing your Income Tax Return (ITR), mention the interest amount under the "Income from House Property" section.
4. Claim Pre-Construction Interest Separately:
   • Calculate the total interest paid during the construction period and divide it into five equal parts for annual deduction.
5. Submit Proofs to the Employer (if applicable):
   • Provide the required documents to your employer for consideration in Form 16.

By following these steps, you can effectively claim tax benefit on plot purchase loan without any hassle.

Eligibility to Claim Plot Loan Tax Benefits

Certain conditions must be met to claim plot loan tax benefits. Here are the eligibility criteria:

1. Loan Purpose:
   The loan must be taken specifically to purchase a plot meant to construct a house.
2. Construction Deadline:
   The house must be constructed within five years from the financial year in which the loan was sanctioned.
3. Type of Property:
   Tax benefits apply only to residential plots, not agricultural or commercial land.
4. Ownership:
   The borrower must be the owner of the property.
5. Documentation:
   Proof of construction and interest paid must be submitted.

Meeting these criteria is essential for availing the income tax benefit on plot loan without complications.

What Are the Additional Plot Loan Tax Exemptions?

Apart from the standard deductions under Section 24(b), borrowers can benefit from other exemptions:

1. Capital Gains Exemption (Section 54F):
   If you sell a capital asset and reinvest the proceeds in constructing a house on the plot, you can claim an exemption on long-term capital gains.
2. Deduction on Stamp Duty (Section 80C):
   While principal repayment doesn’t qualify for deductions, stamp duty charges can be claimed under Section 80C, subject to a ₹ 1.5 Lakh limit.
3. Affordable Housing Benefits:
   For first-time homebuyers constructing affordable housing on the plot, additional deductions under Section 80EEA may apply.

These additional exemptions enhance the plot loan tax benefit India, making it a viable option for tax planning.

Tips for Maximising Advantages When Taking a Plot Loan

To make the most of your tax benefit on plot purchase loan, consider these tips:

1. Plan Construction Timelines:
   Ensure the house construction is completed within the specified five-year period to claim interest deductions.
2. Keep Documents Ready:
   Maintain proper records like loan sanction letters, interest certificates and construction proofs.
3. Opt for Joint Loans:
   Take a joint loan if possible, as co-borrowers can claim individual tax benefits.
4. Combine with Home Loans:
   If you plan to build a house on the plot, clubbing the plot loan with a Home Loan can maximise tax deductions.
5. Consult a Tax Expert:
   Seek professional advice to ensure all eligible deductions are claimed without errors.

These strategies can significantly boost the plot loan tax benefit India, helping you save more.

Conclusion

While plot loans may not offer as many tax benefits as Home Loans, they still provide considerable savings when used strategically. By understanding the plot loan tax exemption rules and adhering to eligibility criteria, borrowers can maximise their deductions and reduce their financial burden.

Proper documentation and timely filing of ITRs further ensure seamless claiming of these benefits.

FAQs

1. Which sections of the Income Tax Act provide tax benefits for plot loans?

Tax benefits are available under Section 24(b) for interest payments, provided the plot is used for constructing a house.

2. How much deduction can I claim under Section 80EE?

Can I claim deductions on the principal amount paid towards my plot loan?

3. What is the Loan-to-Value (LTV) ratio for plot loans?

Depending on the lender, the LTV ratio typically ranges between 70% and 75%.

4. When can I claim tax benefits on my plot loan?

You can claim benefits only after the construction of the house is completed.

5.What about deductions for pre-construction interest on a plot loan?

Pre-construction interest can be claimed in five equal instalments starting from the year of possession.

6. How can I claim deductions on interest payments for my plot loan?

Declare the interest amount under the "Income from House Property" section in your ITR.

7. Are plot loans available for Non-Resident Indians (NRIs)?

Yes, most banks and financial institutions offer plot loans to NRIs, subject to eligibility criteria.