Tax Benefits of Home Loans vs. Loan Against Property

While considering a loan against property or a personal loan to purchase or invest in property, it is essential to know how a loan would influence tax benefits. Both come with different purposes and relative tax implications. This article will explain some of the tax benefits of obtaining a home or a loan against property, giving you a pretty clear choice.

Tax Benefits on Home Loans

a) Section 80C: Deduction on Principal Repayment

There is a deduction that home loan borrowers can claim up to Rs. 1.5 lakh against the repayment amount annually under Section 80C of the Indian Income Tax Act. This is relevant for both self-occupied and rented-out house properties if sold within 5 years of ownership.

b) Section 24(b): Deduction on Interest Paid

By Section 24(b), home loan borrowers may claim a tax deduction of up to Rs. 2 lakh per year on the interest they pay on a home loan on a self-occupied property. In the case of rented property, no upper limit is applied to the deduction of interest, though the entire loss under the head of house property cannot exceed Rs. 2 lakhs.

c) Additional Benefits for First-Time Homebuyers Under Section 80EEA

A Rs. 1.5 lakh limit shall be available for a first-time homebuyer to avail of the deduction under Section 80EEA on home loan interest if the value of the property does not exceed Rs. 45 lakh. This deduction is allowable on loans sanctioned between April 1, 2019, and March 31, 2022.

Tax Benefits on Loan Against Property

a) Tax Deduction Eligibility

Unlike home loans, loan against property tax benefits do not include deductions on principal repayment. On the other side, tax benefits might be possible where it has either been applied as a business expense or has been made for an asset from which the repayment comes under taxable income.

b) Section 37(1): Deduction For Business-Related LAP Interest

Based on multiple purposes, one of the reasons an LAP is usually taken is for business expansion, working capital expenses, or any other expenditure related to business. Interest paid can be claimed under the head of Business Expenses as per Section 37(1) of the Income Tax Act, 1961. This deduction will substantially reduce business income tax liability and will serve as a major tax-planning opportunity for business owners.

c) No Tax Benefits on LAP for Personal Expenses

In case LAP is used for non-business purposes involving personal expenses such as marriage, vacation, or medical emergency, the principal's repayment and interest repayment are not eligible for tax benefits. Therefore, the LAP loses some of its charms as a tax-saving device for an individual who avails them for non-business purposes.

Home Loan vs. LAP: Tax Benefit Comparison

Which Loan is More Tax-Efficient?

Given the higher savings from reduced taxes, a home loan seems to be more tax-effective because of the tax benefits available under Sections 80C, 24(b), and 80EEA; LAP, on the other hand, offers the same benefits only if the money is used for business-related expenses. For tax savings, the best option would be a home loan rather than an LAP, unless it is sure that the funds are going to be used in business activities.

Final Words

Understanding the Home loan tax benefits associated with home loans and LAP can help you make a well-informed borrowing decision. Home loans offer multiple tax deductions that can significantly reduce your taxable income, whereas an LAP provides tax benefits only in limited business-use scenarios. If your goal is tax efficiency, a home loan is the superior choice.