Tax benefits on a land loan

While we have often spoken about home loans, a number of our readers had queries on land loans.

Harsh Roongta, CEO, Apnaloan.com, clarifies your doubts on the tax impact of such loans.

1. Can I take a loan to buy a plot of land?

Yes, you can.

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2. Will I get the applicable tax benefits?

No. You get no tax breaks if you take a loan to buy a plot of land.

But, if you take a loan for construction, that means a loan to build a house on that plot of land, then you can get a tax break.

In such a case, the tax benefits are available on both portions of the loan – the one to purchase the plot and the one taken to construct the house thereon. 

Let's say you took a Rs 5,00,000 loan to buy a plot of land and a year later you took a Rs 3,00,000 loan to construct. Now the total amount will be combined and you will get the tax benefit on the entire amount.

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3. What will be the tax benefits for such loans and when will they be available?

The tax deductions will be applicable only in the year in which the construction is completed.

Section 80C

The principal repayment you make on your home loan is eligible for income deduction under Section 80C. The principal is the actual amount you borrow from the home loan company and does not include the interest payments.

Incidentally, registration and transfer fees paid for the transfer of the plot title fall under this limit (as long as the transfer and registration amount is paid in the year in which the construction is completed).

Let's say that your taxable income is Rs 100,000 and you repaid the home loan principal of Rs 40,000. Your taxable income drops to Rs 60,000 (Rs 100,000 - Rs 40,000).

The overall limit under Section 80C is Rs 1,00,000. This will include certain investments -- provident fund, public provident fund, life insurance premium, equity linked savings schemes of mutual funds, infrastructure bonds, pension plans -- and home loan principal repayment.

There are no sub-limits within this section; you can utilise the entire Rs 1,00,000 exemption for home loan principal repayment deduction if you choose.

• All about Section 80C

Section 24

Under Section 24, if your house is self-occupied, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. 

As a result, your taxable income decreases by that amount.

Let's work it out.

Salary income: Rs 3,50,000
Interest payment on home loan: Rs 1,60,000
Taxable income = Rs 3,50,000 (income) - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000 

This is subject to the fact that the construction of the house is completed within three years from the end of the financial year in which the first disbursement of the plot loan was taken.

This deduction is available in respect of interest payable for the year in which the construction is completed and one-fifth of the interest payable prior to that year.

Let's take an example:

Date on which the plot loan is bought: December 1999
End of that financial year: March 31, 2000
Year in which the construction loan is first taken: April 2002
Construction completed on: April 2005

Here the tax benefits will first be available in respect of the financial year 2005-06.

If the time for construction exceeds that, then the maximum limit for deduction is Rs 30,000.

If the house is given out on rent, there is no maximum limit for this deduction and it also does not depend on the time taken for the construction to be completed.

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4. Will the loan for construction include the cost of all raw materials and labour?

That is right.

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5. After I commence construction, can I avail of the tax benefit on the loan for the plot of land too?

The first tax benefits are available only in the year of completion of construction.

In that year, the accumulated interest (including interest on land loan as well as the construction loan) till the end of the previous year shall be taken together and one-fifth of this cumulated interest plus the interest payable for the specific year will be eligible for deduction.

No tax benefits are available in respect of the principal paid back during the years in which the construction is not complete.

 

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