Tax Benefits on Loan Against Property: What You Can Claim

If you have taken a Loan Against Property (LAP), you might wonder whether you can claim any tax benefits on it. After all, it’s a secured loan backed by your residential or commercial property, and the loan is often used for personal, business or educational purposes. But unlike home loans, LAPs don’t come with blanket tax exemptions. So, what can you claim under the Income Tax Act? To know more, read the blog below!

Tax Benefits on a Loan Against Property

Tax benefits on a Loan Against Property largely depend on how you use the borrowed amount. While both salaried and self-employed are eligible to apply for such loans, the availability of tax deductions is conditional. You can claim deductions only on the pay of interest, and only under specific scenarios like:

• Construction or purchase of a new house (applicable to salaried individuals)
• Utilization of the loan for business purposes

It’s important to note that no tax benefits are available on the principal repayment of a Loan Against Property.

Section 24 (b): When Tax Deductions are Allowed

Section 24(b) of the Income Tax Act allows you to claim a deduction on the interest you pay on certain types of loans. It mainly applies to home loans, but in some cases, you can also claim this benefit on a Loan Against Property.

Here’s how it works:

If you use the LAP amount for business purposes or for education, you may be able to claim a deduction on the interest paid. This deduction doesn’t fall under the usual ₹2 lakh limit meant for home loans. Instead, the interest is treated as a business expense, so there’s no fixed limit, but the usage must be clear and provable.

For example:

If you mortgage your property and use the funds to expand your business, the interest you pay can be shown as a business expense while filing your income tax return.

In short, Section 24(b) can help you save on taxes through a Loan Against Property, but only if the loan is used smartly and for the right reasons.

When Tax Benefits are Not Applicable

You cannot claim any tax benefits on a LAP if:

• You use the funds for personal expenses like travel or lifestyle purchases.
• You fail to maintain documentation about how the money was used.
• The purpose of the loan doesn’t align with deductions allowed under any section of the Income Tax Act.

How to Claim Tax Benefits on Loan Against Property

Here’s what you need to do to legally claim any tax benefit:

• Maintain Usage Records: Keep receipts, invoices, and bank transfers that show LAP funds were used for business, education, or medical needs.
• Separate Personal and Business Expenses: If using a Loan Against Property for business, don’t mix personal spending.
• Consult a CA or Tax Advisor: Especially if claiming deductions under income from business or profession.
• Declare Interest Paid: Include it in your ITR under the appropriate section.
• Retain the Loan Agreement: It shows the terms, purpose, and disbursement details.

If you are self-employed or running a small business, treating a Loan Against Property as a business expense can significantly lower your tax outgo.

Tips to Maximize Your Tax Savings on LAP

Want to save more? These strategies can help:

• Use the funds for income-generating purposes, like business growth or higher education.
• Plan loan usage in advance and align it with allowable tax deductions.
• Keep your interest outgo clear, choose EMI options that prioritise interest repayment in the initial years if your usage qualifies for deductions.
• Choose the right repayment tenure to balance tax savings and monthly outflow.
• Stay updated with tax law changes, especially any updates to Section 24(b) or new deductions for business owners.

To Conclude

A Loan Against Property can be a powerful financial solution if you need a large sum at relatively low interest rates . However, when it comes to tax benefits, it’s not as straightforward as a home loan. So, your ability to claim tax deductions depends on how you use the funds. If you use the loan for business or education, you may be able to save on taxes through interest deductions under Section 24(b) or as a business expense. So be strategic, document well, and consult a professional if you are unsure.

Frequently Asked Questions

Can I claim tax benefits on the principal repayment of a Loan Against Property? 

No, tax benefits are generally not available on the principal repayment of LAP. Only interest payments may qualify under specific conditions.

Can salaried individuals claim tax benefits on LAP? 

Yes, if the loan is used for eligible purposes like education or medical expenses. However, business-related deductions are more common for self-employed individuals.

What happens if I use LAP for mixed purposes (business and personal)?

Only the portion used for eligible purposes can be claimed. You must clearly separate and document the usage.

What documents are needed to claim tax benefits on LAP? 

You will need usage records (invoices, receipts), the loan agreement, bank statements, and proof of how the funds were used.