Know All About Top-up Loans and How to Avail of Tax Benefits

Securing a Home Loan can be a significant milestone in your homeownership journey. With the right knowledge, you can find the best financing option for your requirements. A Top-up Loan allows you to meet various housing-related expenses, such as home renovations, expansions, or repairs. In this article, we explore the benefits of a Top-up Loan along with the tax exemptions it provides. 

What is a Top-up Loan?

A Top-up Loan is a loan that you can avail of over and above your Home Loan. However, to be eligible for it, one must fulfil certain conditions:  

• Maintain a one-year track record of regular repayments if you wish to transfer your Home Loan from another lender
• Have fully repaid the existing mortgage for at least six months.

It is essential to clear all the missed EMIs and ensure that you have not missed more than one EMI in the previous year. You can avail of a Top-up Loan of Rs.1 Crore* or more, based on your eligibility. The final amount of the top-up depends on the outstanding loan amount as well as the value of the property that serves as a collateral. 

How to Avail of a Top-up Loan?

To apply for a Top-up Loan, you will have to fill out the application form provided by your lender. As you already hold an existing loan account with them, the documentation required may be minimal. Document requirements will be communicated to you by the lender. Further, since Top-up Loans require minimal documentation, they may get approved quickly. 

Benefits of Top-up Loans

Here are some of the reasons why a Top-up Loan is preferred: 

Comes with Flexible End-Use

Funds availed through a Top-up Loan come with end-use flexibility, which means they can be used to meet home renovation or remodelling expenses. 

Can be Availed of through a Hassle-Free Process

If you need funds urgently to meet your housing expenditures, the easiest way to arrange funds can be to opt for a Top-up Loan. When you already have an existing Home Loan, availing of a Top-up Loan involves less documentation. As an existing customer, the lender is already familiar with your financial status, which streamlines the process.

Allows you to Access a Sizeable Amount 

You can avail of a sizeable loan amount of Rs.1 Crore* or more, based on your eligibility and the property value. 

Comes with Competitive Interest Rates

Eligible borrowers can avail of Top-up Loans at competitive interest rates. Typically, the interest rates start as low as 7.75%* p.a., for salaried applicants. 

Also Read: Important Factors that Affect Your Home Loan Interest Rate 

How to Avail of Tax Benefits on a Top-up Loan?

If you have availed of a Top-up Loan, you can be eligible for tax benefits. However, these benefits can be claimed only in specific scenarios.  

If a borrower uses a Top-up Loan to redecorate or refurbish their residential property, the Income Tax Act, 1961 allows them to claim a maximum of Rs.30,000 as tax exemption. However, borrowers must also know that this tax exemption comes within the deduction slab of Rs.2 Lakh per year allowed for payments made towards the interest component of a Home Loan. You can use an Income Tax Calculator to calculate tax savings on a Home Loan. 

Documents Required for Tax Benefits

There are a number of documents required to avail of tax exemption on a Top-up Home Loan, which may include the following: 

• Property ownership documents 
• Certificate of purchase or construction  
• Home Loan certificate with interest and principal details  
• Municipal taxes receipt  
• Financial and personal documents of the taxpayer  

Steps to Claim Tax Benefits

There are mainly 4 steps to follow in order to claim tax benefits on a Home Loan Top-up: 

Step 1:  Arrange the documents – In order to claim any deduction, you need to submit various documents ascertaining your position as the rightful owner and income taxpayer. 

The documents include those having ownership details of the property, date of completion of construction/date of property purchase, borrower details, bank/lender certificates, and municipal tax receipts.  

Step 2:  Submit them to your employer - Once you have collated the required relevant documents, you need to submit these to your employer so that they can adjust your TDS accordingly. If you are self-employed, you will need these documents at the time of estimating your advance tax liability for each quarter.

Step 3: Calculate your income from house property - Calculate the deductions applicable to you based on whether the property is self-occupied or rented. It is advisable to consult with a financial advisor before claiming the maximum deduction.

Step 4: Claim deduction – You can claim interest on Home Loan deduction and principal repayment while filing your income tax returns.

Final Words

A Top-up Loan provides a flexible, quick, and cost-effective way to fund housing-related expenses, with the added benefit of potential tax exemptions. Understanding the tax exemptions available on a Top-up Loan can help you maximise savings. 

*Terms and conditions apply.