How we can claim tax benefits on a top-up home loan?

A standard home loan offers tax advantages such as a deduction of up to Rs. 1.5 lakh on principal repayment according to section 80C of the Income Tax Act and up to Rs. 2 lakh on interest paid according to section 24 in a financial year. Even, you can claim tax incentives if you have taken a top-up on your home loan.

But before we know what home Loan tax benefit you can be entitled to, first our attempt should be to understand what a top-up loan is.

What is a top-up home loan? 

A top-up loan is a financial option offered by banks, mortgage financing providers, leading financial institutions, etc., allowing borrowers to repay a guaranteed amount above and over the original home loan they have already lent from the lender.

  • NBFCs offer these top-up loans to their current home loan clients. The overall sum that one can get from top-up loans depends largely on the lender.
  • And the interest rate on these loans is typically cheaper than what, in the case of personal loans, the client will expect to payout.
  • Any financial institutions extend such a loan specifically for the reconstruction or maintenance of the building, while others also disburse it so that it can be used for some reason, such as financing a holiday, education, marriage of a daughter, etc.
  • However, here, it should be recalled that the cap of Rs 30,000 is only applicable for a detached residence. Tax benefits on top-up home loans In the case of maintenance and improvements to the leased house have no limits to the deduction.
  • The highest compensation that can be sought against other heads of revenue during a fiscal year, however, is 2 lakh rupees. Any interest charge in excess of Rs 2 lakh during the financial year must be withheld for up to eight years.
  • There is one condition to consider whilst requesting a reduction from the principal repayment. The tax advantage on capital gains relies on the use of the money. Where the funds are used to build or buy a new home, the principal and the interest shall be liable for a deduction according to the limitations laid down in Articles 80C and 24(b), respectively.
  • If, moreover, the funds are used for the maintenance, reconstruction, or adjustment of the properties, no exemption may be claimed from the capital repayment.

Let’s talk about a practical example

Assume you pay Rs. 32,000 interest on a top-up home loan, so you are granted a maximum Rs. 30,000 deduction on this number. Besides, if you paid the interest on a daily home loan, it will be deducted from the balance of Rs 1.7 lakh. So, in a financial year, the gross deduction on interest paid on home and top-up loans is Rs. 2 lakh.

The deduction cap of Rs. 30,000 for interest paid on top-up loans is also only valid for a self-occupied home. And if restoration and maintenance of a let-out property are done, there is no limit on the deduction that may be stated. In a financial year, any interest paid above and above Rs 2 lakh will have to be carried forward for up to eight years. With PNB Housing, you get access to the cheapest home loan interest rate in the country.