A home loan top up is a financial product offered by banks, housing finance companies, and other financial institutions that permit you to pledge for a specific amount over and above your existing home loan. These top-ups are generally used for renovation or repairing work of home when you have a long repayment tenure of home loan. Some banks also offer top-up loans for personal purposes such as education, wedding, vacation, etc. Low home loan interest rate makes home loan top ups less costly than personal loans.
Tax benefits on home loan top up
Many tax benefits can be claimed on regular home loans. Under section 80C of the Income Tax Act, a deduction of up to Rs. 1.5 lakh can be claimed on the principal amount, and under section 24, a deduction of up to Rs 2 lakh on the interest paid.
Type of property – Home loan tax benefit can also be claimed if a top-up has been taken on the home loan. However, certain conditions become applicable. If the top-up loan is used for renovation or repairs, the maximum deduction limit is Rs. 30,000. But do not forget, this limit is set for a self-occupied house only. If the top-up is used for renovation and repairs of a let-out property, there is no limit on the deduction to be claimed.
Use of the home loan top up – It is essential to note that the consumption of the funds will decide the home loan tax benefit on the principal repayment you are entitled to. If the funds are consumed for construction or buying fresh property, the principal with interest will be allowed for deduction as per the limits mentioned in 80C and 24(b), respectively. But if the funds are consumed for renovation, alteration, or repair work of the property, you cannot claim any deduction on principal repayment.
While claiming a tax deduction
Tax benefit on payment against home loan interest rate may be claimed even before actually paying it. If the interest is payable, it can still be claimed. The documents must, however, be maintained properly.
A deduction will be available only if the loan is used for renewals and renovations or the purchase or construction of a house. If the top-up loans are used for personal purposes, you are not entitled to any deductions.
Lastly, remember to keep your documents and receipts safe and handy, as the tax authorities may approach you for proof.
Check your new EMI burden afresh as a home loan top-up will escalate it. You can use a home loan EMI calculator to find the same. It cannot be denied that a home loan top up truly turns empty rooms into a dream home.