About Top Up Loans and The Process to Avail of Tax Benefits _Banner_WC


What is a Top-up Loan_WC

5 min 12 Dec 2023
Avail Tax Benefits on Top Up Loan
  • Understanding Top-up Loans
  • Benefits of Top-up Loans
  • Top-up Housing Loan Tax Benefits

The decision to become a homeowner often starts with searching for a house that feels like home. For external financial assistance and a smooth homeownership journey, you can opt for a Home Loan. Once you've found your dream home within budget but require additional funds for renovation, a Top-up Loan can be a solution. This article delves into Top-up Home Loans and their associated tax benefits.

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:  

  • ​Ensure all missed EMI payments are cleared. 

  • To merge a balance transfer from another lender's Home Loan with a Top-up Loan, maintain a one-year track record of regular repayments.

  • 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

  • Have fully repaid the existing mortgage for at least six months.

  • Avoid missing more than one EMI payment in the previous year.

How to Avail of a Top-up Loan?

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 should know that lenders charge interest rates slightly more than Home Loans.  

Benefits of Top-up Loans

Here are some of the reasons why Top-up Loans are preferred by the borrowers:

They Come with Flexible End-Use

Top-up Loans come with flexible end-use. In simpler words, one can use the funds availed of as a top-up to meet housing requirements. You can use the funds for home renovation or remodelling. 

It is a Relatively Hassle-Free Process

If you are in a situation where you need funds urgently, the easiest way to arrange funds would be to opt for a Top-up Loan. Applying for and obtaining Top-up Loans is quicker and requires less documentation when you already have a Home Loan running. Since you are an existing customer, lenders would be aware of your financial standing. Thus, availing of a Top-up Loan is easier and simpler. 

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 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 funds 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 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 funds are 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 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. 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 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 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 of 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.

Final Words

A Top-up Loan is a simple and quick way to arrange funds for housing expenses. Top-up Loans offer several benefits, one of which is tax benefits. However, these benefits can be claimed only when the paperwork is complete and up to date.

*Terms and conditions apply. 



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