The decision to become a homeowner often starts with searching for a house that feels like home. You searched for good homes and found something that you instantly loved. It was well within your budget, but you needed external financial assistance. So, you opted for a Home Loan. Now you are a homeowner, but you still need more money to decorate your home so that it is exactly like the dream home you have always wanted. What do you do? In this case, a Top-up Loan can come handy. This article concerns itself with top-up Home Loans and tax benefits on top-up Home Loans.
What is a Top-up Loan?
A Top-up Loan is a loan that borrowers can avail of over and above their Home Loan. However, to be eligible for a Top-up Loan, one must fulfil certain conditions:
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A borrower can avail of a Top-up Loan only if they already have a Home Loan running with a lender.
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To be eligible for a Top-up Loan, a borrower must have paid at least a few EMIs.
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Though borrowers can avail of Top-up Loans of Rs.1 Crore* or more, the final value of the top-up depends on the outstanding loan amount as well as the value of the collateral you have pledged as security with the lender.
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You will get a Top-up Loan only if you have cleared all your EMIs on time and your credit score is excellent.
How Top-up Loan Works?
It is quite easy to avail of Top-up Loans. Since you already have a loan account with the lender, you won't be asked for a lot of documents. Document requirements will be communicated to you in advance by the members of your lender's team. Further, since Top-up Loans require minimal documentation, they get approved relatively faster. Lastly, borrowers planning to avail of a Top-up Loan must know that lenders charge interest rates slightly more than Home Loans.
Benefits of Top-up Loans
Top-up Loans have become extremely popular in the last few years and there are several reasons why.
They Come with Zero End-Use Restrictions
Top-up Loans come with no end-use restrictions. In simpler words, one can use the funds availed of as a top-up to meet any personal or professional requirements. You can use the money to buy another house, start a new business, or even take a luxury trip abroad. As long as you continue to pay your EMIs on time, your lender won't ask you how you are spending the top-up money.
It is a Relatively Hassle-Free Process
If you are in a situation where you need money urgently, the easiest way to arrange funds would be to opt for a Top-up Loan. The other way to arrange money would be to opt for a personal loan. However, applying for and getting Top-up Loans is quicker and requires less documentation when you already have a Home Loan running. Since you are an existing customer, they would be aware of how financially responsible you are. Thus, availing of a Top-up Loan is far easier and simpler than availing of a personal loan.
You Will Get Ample Time to Repay the Loan
Your Top-up Loan is, in a way, your second mortgage loan and paying off two loans at the same time is no easy task. The only way to make repayment easier is to opt for a long tenor. With Top-up Loans, borrowers get the flexibility to pay off the loan over a long tenor making repayment easier.
Competitive Interest Rates
Top-up loans come at competitive interest rates. The interest rate you will be charged will be only 1% to 2% higher than the interest rate you are being charged on your Home Loan.
Also Read: Important Factors that Affect Your Home Loan Interest Rate
Top-Up Housing Loan Tax Benefits
Yet another big advantage of a Top-up Loan is that it comes with a Home Loan top-up income tax benefits. One can save a lot of money by way of a Top-up Loan. However, this is possible only when certain conditions are met.
How to Avail of Tax Benefits on a Top-up Loan?
If you have taken a Top-up Loan, know that you will be eligible for Top-up Home Loan tax exemptions. However, these benefits can be claimed only in specific scenarios.
If a borrower uses the Top-up Loan money to redecorate or refurbish their residential property, the Income Tax Act allows them to claim a maximum of Rs.30,000* as tax exemption. However, borrowers must also know that this Rs.30,000* tax exemption comes within the deduction slab of Rs.2 Lakh* per year allowed for payments made towards repayment of the interest component of a Home Loan. You can use an income tax calculator to estimate the payable income taxes and savings from the exemption.
If a borrower uses the Top-up Loan to buy another property, one can claim deductions on payments made towards both principal and interest repayment. In this case, one can claim tax deductions up to the limit of Rs.2 Lakh* on payments made toward interest repayment and up to a maximum of Rs.1.5 Lakh* on payments made towards principal repayment. However, if the money is used to redecorate or refurbish a residential property, one can only claim deductions on the interest component of the loan.
Documents Required for Tax Benefits
There are a number of documents required to avail tax exemption on Top-up Home Loan that 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 Home Loan. Here are the steps to follow:
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 tax payer.
The documents include those having ownership details of the property, date of completion of construction/date of property purchase, borrower details, bank/lender certificates, municipal tax receipts.
Step 2: Submit them with 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 - In case your property is self-occupied, you can avail a maximum deduction of Rs.2 Lakh while there is no cap for a let-out property.
Step 4: Time to claim deduction – You can claim Interest on Home Loan Deduction and Principal Repayment while filing your income tax returns
A Top-up Loan Will Make Your Life Easier
A top- up loan is a simple and quick way to arrange funds. Top-up Loans offer several benefits. One of the biggest benefits of a Top-up Loan is that it allows borrowers to claim tax benefits. However, these benefits can be claimed only when the paperwork is complete and up to date. So, make sure you have eventing ready with you.
*Terms and conditions apply.
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