How will you benefit from investing early in mutual funds?

Any regular home loan offers tax benefits such as deduction 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 as per Section 24 in a financial year. But if you have an additional top-up home loan, you can claim tax benefit on this as well.

Top-up loans allow you to borrow money over and above existing loan plans. This is a facility provided by banks, housing finance companies and other financial institutions to help you fund bigger expenses. One can either request for a top-up from the existing lender or transfer it to a new lender with a request for a top-up.

“Interest on housing loan, subject to the monetary ceiling, is allowed as a deduction from income under Section 24(b). The interest of up to Rs 2 lakhs can be claimed u/s 24(b) if the house is self-occupied, and if the house is let out then full interest deduction is allowed,” Gauri Chadha, tax expert, said.

Tax deduction limit on renovation

To claim tax benefit on a top-up loan, you must have the receipts and documents to prove that the top-up home loan has been used strictly for acquisition, construction, repair or renovation of a residential property. The important point to note is if the top-up loan has been taken for any kind of renovation within the property, the maximum tax deduction offered in this case is Rs 30,000. If the repairs have been carried out in a let-out property, then there is no limit on the deduction that can be claimed. Moreover, deduction available on interest will remain under the overall limit of Rs 2 lakh.

For instance: You pay an interest of Rs 35,000 on a top-up home loan. Here, the maximum deduction you can claim is Rs 30,000. Now if you’re paying interest on your regular home loan, it will be deducted from the balance Rs 1.7 lakh (Rs 2 lakh minus Rs 30,000). Thus, the combined interest deduction on your home loan and top-up will be Rs 2 lakh in a financial year.

Using Top-up loan for other purposes

Now, what if you want to lend some money from the top-up home loan to your spouse? What would be the tax implications?

Firstly, you must refer to the loan agreement to understand whether your top-up housing loan mentions any restrictions with respect to the end-use of the funds. Mostly, no such limitation exists.

“Generally, there should not be any restriction on the end use of this loan like in normal housing loan. If there is no restriction, then you can lend the money to your wife but the income which is generated will be clubbed in your income if you give it without interest. If you plan to give it with interest, do make a proper loan agreement and make all the transactions in a mode other than cash. As far as tax benefits are concerned, you will not get the benefit of interest deduction since it is not used for housing purposes as mentioned,” Chadha explained.

Since the money being lent will not be utilised for the acquisition, construction, repairing, renewal or reconstruction of the house, one cannot claim interest expense under section 24(b).