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 homework when you have an extended repayment tenure of a 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 private 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 a new 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 paying it. If the interest is payable, it can still be claimed. The documents must, however, be appropriately maintained.
A deduction will be available only if the loan is used for renewals and renovations or the purchase or construction. If the top-up loans are used for personal purposes, you are not entitled to 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. You can use a home loan EMI calculator to find the same. It cannot be denied that a home loan top-up indeed turns empty rooms into a dream home.