What is a land loan?
Land loans finance your purchase of a plot of land on which you may either begin construction immediately or wait a while before commencing. This loan is usually availed of if you do not want to incur an immediate cash outflow. As there are difficulties with documentation and the unwanted possibility of encroachments, not all Housing Financial Institutions (HFI) offer land loans.
How land loan is different from Home Loan?
The rate of interest charged on a land loan is on a par with the rate charged on a home loan. Unlike home loans, you cannot claim income tax deductions on interest paid on land purchase loans. When you take a loan for construction on the site, you become eligible for tax break. Here you can claim tax benefits on both loan for land purchase and loan for house construction. Tax deductions will be applicable only in the year in which the construction is completed after submission of completion certificate from authorities concerned.
What are the Tax benefits on Land Loan?
There is not tax benefits if you go for land loan to buy a plot of land.
But, if you take a loan for construction, that means a loan to build a house on that plot of land, then you can get a tax break.
In such a case, the tax benefits are available on both portions of the loan the one to purchase the plot and the one taken to construct the house thereon.
Let’s say you took a Rs 5,00,000 loan to buy a plot of land and a year later you took a Rs 3,00,000 loan to construct. Now the total amount will be combined and you will get the tax benefit on the entire amount.
What will be the tax benefits for such loans and when will they be available?
The tax deductions will be applicable only in the year in which the construction is completed.
Section 80C : The principal repayment you make on your home loan is eligible for income deduction under Section 80C. The principal is the actual amount you borrow from the home loan company and does not include the interest payments.
Incidentally, registration and transfer fees paid for the transfer of the plot title fall under this limit (as long as the transfer and registration amount is paid in the year in which the construction is completed).
Let’s say that your taxable income is Rs 1,00,000 and you repaid the home loan principal of Rs 40,000. Your taxable income drops to Rs 60,000 (Rs 100,000 – Rs 40,000).
The overall limit under Section 80C is Rs 1,00,000. This will include certain investments — provident fund, public provident fund, life insurance premium, equity linked savings schemes of mutual funds, infrastructure bonds, pension plans — and home loan principal repayment.
There are no sub-limits within this section; you can utilize the entire Rs 1,00,000 exemption for home loan principal repayment deduction if you choose.
Section 24 : Under Section 24, if your house is self-occupied, the maximum amount of interest that can be deducted from your income is Rs 1,50,000.
As a result, your taxable income decreases by that amount.
Let’s work it out.
Salary income: Rs 3,50,000
Interest payment on home loan: Rs 1,60,000
Taxable income = Rs 3,50,000 (income) – Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000
This is subject to the fact that the construction of the house is completed within three years from the end of the financial year in which the first disbursement of the plot loan was taken.
This deduction is available in respect of interest payable for the year in which the construction is completed and one-fifth of the interest payable prior to that year.
Let’s take an example
Date on which the plot loan is bought: December 2005
End of that financial year: March 31, 2006
Year in which the construction loan is first taken: April 2008
Construction completed on: April 2011
Here the tax benefits will first be available in respect of the financial year 2011-12.
If the time for construction exceeds that, then the maximum limit for deduction is Rs 1,50,000.
If the house is given out on rent, there is no maximum limit for this deduction and it also does not depend on the time taken for the construction to be completed.
What are the additional documents required for a land loan?
Apart from the usual documents needed for Home Loans, you also need to submit the following docs.
- Original documents regarding land ownership.
- ‘No Encumbrance’ certificate for the land.
- The layout / drawing of the plot’s location, approved by the Town Planning Authority.
- Revenue receipts and land records for the plot of land.
- Tax receipts for taxes paid by the owner of the plot of land.
What type of Land can be purchased?
A person who wants to buy an agricultural land cannot avail a land loan. A land loan is exclusively meant to purchase plots for residential purposes. Some banks require the land to be within municipal limits. Further, some banks add restrictive clauses that require the purchaser to begin construction on the land within six months to a year.
Will the loan for construction include the cost of all raw materials and labour?
Yes, construction cannot happen without material and labour. The cost shall therefore includes cost of all raw materials and labour.
After I commence construction, can I avail of the tax benefit on the loan for the plot of land too?
The first tax benefits are available only in the year of completion of construction.
In that year, the accumulated interest (including interest on land loan as well as the construction loan) till the end of the previous year shall be taken together and one-fifth of this cumulated interest plus the interest payable for the specific year will be eligible for deduction.
No tax benefits are available in respect of the principal paid back during the years in which the construction is not complete.
What are the general terms and conditions that are a part of Land Loans?
The general terms and conditions applicable to Land loans are as given below:
1)Most HFIs insist that the purchase of land is from a development authority or society and some also allow purchase from developers. Purchase of land from an individual owner is not usually financed by HFIs.
2)The land has to be developed and boundaries must be clearly demarcated. The location of land is also extremely important and most HFIs only finance those plots that are within the limits of the Concerned Municipal Corporation.
3)The maximum loan tenure offered by a HFI for the purchase of land is 10 years and they either charge around 1% of the loan amount as fee, or they charge a flat amount.
4)Limits regarding the maximum and minimum loan amount lent for plot purchase are demarcated by HFIs and differs from HFI to HFI depending on the schemes they offer.
5)Age norms, eligibility calculations and repayment of land loans are similar to those of normal Home Loans.
6)The limit on the LTV ratio financed for land purchase varies from HFI to HFI from anywhere between 70% to 80%.
7)Depending on the type of land, some HFIs insist on additional/collateral security, while for most, loan security occurs in the form of an equitable mortgage by taking deposit of the original title deeds of the plot of land.
8)As always, unless you have paid a sum to buy the land, the disbursement is in favour of the seller of the plot. Normally, HFIs do not offer loans to plots of land purchased over six months ago.
9)The rate of interest on a land loan is usually similar to the rate of interest charged on regular Home Loans.