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Here's how you can claim tax benefit on a top-up home loan
January, 02nd 2019

Some of us who want to renovate or repair our homes take a top-up over the home loan due to the long tenure of our mortgage (usually 15-20 years).

A regular home loan offers various tax benefits. These include a deduction of up to Rs 1.5 lakh on the principal repayment under section 80C of the income tax Act and up to Rs 2 lakh on the interest paid under section 24 in a single financial year. Now, other than this, did you know there is way you can claim tax benefit on a home loan? Yes, you can claim a tax benefit if you have taken a top-up on your home loan.

Some of us who want to renovate or repair our homes take a top-up over the home loan due to the long tenure of our mortgage (usually 15-20 years). Here's a look at what a top-up loan is and the tax benefit you can claim on the loan.

What are top-up home loans?
A bank usually offers top-up loans to its existing home loan borrowers. According to websites of banks, the interest rate on such loans is usually lesser than what a borrower would have to pay on personal loans. Some banks offer top-up loans that can be used for any purpose like daughter's wedding, a vacation and so on. Others offer these loans that have to be used exclusively for the purpose of repairs and renovations of the house.

Tax benefits on top-up home loans
Practising Chartered Accountant Sachin Vasudeva says, "You can claim tax benefit on the top-up loan, provided you have receipts and documents to prove that the top-up home loan taken has been used for acquisition/ construction/repair/renovation of a residential property."

Abhishek Soni, CEO & Founder, Tax2win.in, a tax-filing website says, "Unlike a normal home loan where maximum deduction available on interest payments is Rs 2 lakh, if the top-up loan has been taken for repairs and alterations, then the maximum deduction available in such regards is of Rs 30,000."

Remember the deduction available on interest will be under the overall limit of Rs 2 lakh. This can be explained with an example below. Suppose, the interest paid by you on the top-up home loan is Rs 32,000. Here, the maximum deduction you can claim is Rs 30,000. If there is any interest payment made on the regular home loan that will be deducted from the balance Rs 1.7 lakh (Rs 2 lakh minus Rs 30,000). Therefore, the total interest deduction on the home loan and top-up will be Rs 2lakh in a financial year.

"However, here one must remember that the limit of Rs 30,000 is available for a self-occupied house only. In case repairs and renovations have been done on a let out property, in that case, there is no limit on the deduction can be claimed. However, maximum set-off that can be claimed in a financial year against other heads of income is Rs 2 lakh. Any interest payments over and above Rs 2 lakh in a financial year will have to be carried forward up to eight years," explains Soni.

While claiming deduction on the principal repayment, there is a condition that one must remember. Vasudeva says, "The tax benefit on the principal repayment depends on the usage of the funds. If the funds are used for the construction or purchase of a new property, the principal along with interest will be eligible for deduction subject to the limits provided in section 80C and 24 (b), respectively. However, if the funds are used for the repairs, renovation or alteration of the property, then no deduction can be claimed on the principal repayment."

Dos and don'ts while claiming the deduction
You can claim deduction on the interest part of the payment, even if you have missed the actual payment. This is because section 24 mentions the words "paid or payable" is respect of interest payment on housing loans. However, remember to keep the documents safely in case tax authorities ask you for proof.

Secondly, the deduction (either on interest payments/principal repayment or both) will be considered eligible only if the loan amount is used for repair, renewals, alterations or purchase/construction of house. If the top up loan is used for any other purpose like children's education, family holiday etc. then no deduction will be available.

Lastly, one must keep receipts and documents to prove that the loan taken is used for repair/ renovation of the residential property.

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