Ask ten borrowers the question, “Which loan do you prefer for saving income tax?” and at least eight of them would reply, “Housing loan.” While the answer is not wrong, it is not the golden truth.
This article aims to debunk this myth and show you how applying for a loan againstproperty can help you to save taxes.
Loan Against Property Interest Rates
When you apply for a loan against property, a lender would ask for your interest rate preference.
If you choose a fixed interest rate, the lender would look at the prevailing open-market interest rate, add a few basis points to it, and quote you an interest rate. Once decided, the interest rate would remain the same for the entire tenure of the loan.
If, however, you select the floating rate of interest, your interest would fluctuate through the tenure of the loan.
At present, the interest rates are between 10.25% and 11% for a loan against the residential property.
For loans against commercial properties, the interestrate is between 10.50% and 11%, and around 11.25% for plots.
How Can You Save Taxes by Applying for a Loan Against Property in 2020?
A loan against property allows you to save taxes under two Sections of the Income Tax Act.
1. Section 37(1)
Section 37(1) of the Income Tax Act allows you to save taxes on interest, and related charges, only when you use the funds for expanding your business or any other business purpose.
However, you cannot claim tax deductions if you are planning to use it for transforming the property you mortgaged for the loan.
Click here to read more about the various clauses of Section 37(1).
2. Section 24(B)
You may save taxes on interest of up to Rs. 2 lakh by using the provisions of Section 24(B). To avail of tax deductions under this Section, you need to satisfy the following criteria:
a. You should be a salaried employee of any public or private organisation.
b. You should use the loan amount to construct a new house or purchase a constructed house or flat.
Saving up on taxes is an excellent way to reduce the effective interest rate of a loan against property.
Click here to understand Section 24(B) in detail.
Other Important Points to Keep in Mind
1. Although you get tax benefits on interest, no such benefit is applicable for principal repayment.
2. You cannot use the provisions of Section 80C to save taxes on loans against property.
3. You can claim tax deductions even without paying the amount. However, you should pay it later and retain a copy of the same.
4. Try to keep yourself updated with the latest changes in the policies of the lender and the government.
Although the start to 2020 has not been the best, that should not deter you from availing a loan against property at cheap interest rates and save taxes in the process.
Being a wise borrower, you must compare the loan against propertyinterest rate of various lenders before applying for the best one.