Get a tax deduction for a ‘top-up’ on home loan

K. ARAVIND

Tax planners need to be aware of all the ways to get a tax deduction. Ignorance of all the ways to get tax relief can lead to loss of eligible exemption.

Take home loan itself as an example. Home loans are one of the main ways in which monthly income earners can avail tax relief. Most salaried people rely on home loans to make their dream home a reality. Under Section 80C of the Income Tax Act, a repayment of Rs.1.5 lakhs on home loan and repayment of interest of Rs.2 lakhs under Section 24 of the Income Tax Act can be tax deductible every financial year. This is a tax deduction used by most taxpayers. At the same time, in addition to this, tax relief is also available for the top-up of home loans.

Home loan borrowers also have the option of taking a top-up loan on it. Top-up loan is a special facility provided by banks if the borrower has repaid the loan on time. The top-up loan will be the equivalent of the loan repayment so far. It can be used for home decoration and so on. There is no impediment to disbursement for other financial purposes. Such loan is given without any preconditions regarding utilisation.

Banks allow only a fixed percentage of home loans as top-up loans. Normally, 80-85 per cent of the value of the house is given as loan. The loan will be sanctioned only if the balance of the loan and the top-up loan are not more than 85 per cent of the current value of the home. The term of the top-up loan will be the same as the term of the existing home loan.

Top-up loans can also be tax deductible, but as there are no specific conditions for granting such loans, adequate documentation must be kept to show for what purpose it was spent. Concessions can be obtained by producing documents proving that the top-up loan was used to buy, build, repair or renovate a home. If the loan is used for other purposes, relief will not be available.

Top-up loans may not be as discounted as regular home loans. In the case of ordinary home loans, as per Section 24 of the Income Tax Act, a tax deduction can be availed for interest payable for loan amount above Rs.2 lakh up to a maximum of Rs. 30,000. For example, suppose you get a tax deduction for repaying an interest of Rs. 1,70,000 on a home loan. If you have made a repayment of Rs. 30,000 on the interest on the top-up loan, you can also get a discount on it. Thus a full tax deduction of Rs.2 lakhs can be obtained.

The limit of Rs. 30,000 is applicable only for repayment of interest on top-loan taken for repairs of taxpayer-owned house. At the same time the limit does not apply if it is a top-up loan taken for house given on rent. Tax deduction can be availed only for interest up to a maximum of Rs. 2 lakhs per annum. If the principal interest is more than Rs 2 lakh, the amount can be tax deductible in the coming years. Thus, tax relief is available on the repayment of the remaining interest for the next eight financial years.

In case of repayment of capital, tax deduction will be available according to the use of the loan. If the loan is utilised for construction or purchase of a new home, the tax deduction is available up to the limit as per the Income Tax Act for repayment on the loan. At the same time, if the loan is used for home repairs or renovations, no tax deduction will be available for repayment on the loan.