June 21, 2024

What exactly is a plot loan?

A plot loan is a type of loan offered by a bank to applicants who wants to purchase a plot of land on which they want to build their dream home. SBI Plot loan are designed to make the acquisition of a plot of land easier. It is frequently confused with a home loan and is also known as a land loan. However, there is a difference between the two such loan. The distinction between plot and home loans is that a plot loan can be used to acquire the land on which the house will be built later.

How Plot loan and home loan are different from each other?

Before we understand how these two types of loan are different from each other, let’s first understand how they are similar. Both of these loans require lenders’ due diligence. Furthermore, the equated monthly instalment (EMI) alternatives available for these loans, as well as the requirements for co-applicants, are relatively the same for both land and home loans. Aside from that, the loan application process and interest rates on which SBI MCLR Rate are calculated are the same for both. Now let’s understand how these two are different from each other:

Maximum loan term: Although the loan tenure can be chosen depending on personal preferences and income flow, the maximum loan tenure for a home loan is 30 years, whereas land loans can be repaid in a maximum of 15 years.

Tax advantages: Tax benefits are available for both principal and interest on home loans. On the contrary, in the case of SBI Plot loan, tax benefits are only available to offset construction costs. 

Loan to value (LTV): This is the amount of money that can be borrowed in relation to the value of the property. In the case of a home loan, the loan-to-value ratio is from 75% to 90%, while for a land loan, the ratio ranges from 75% to 80%. In other words, one must invest a minimum of 20% of the entire loan value, and in the case of a home loan, the minimum investment is 10%.

Is there a way to get tax exemption from a Plot loan?

When applying for a loan, most of us search for tax benefits. Many people question if such benefits are available for SBI Plot loan as well. While there is no definitive answer, we can confidently assume that it is dependent on what the buyer intends to do with the purchased site. It is broadly classified into two categories:

If you buy a plot with no intention of building anything on it and plan to sell it for a profit in the future you will be dismayed to hear that you are not entitled to any tax benefits.

However, if you intend to buy a plot to build a villa, bungalow, house, or any other structure, you are eligible for tax breaks. The tax benefit applies to both loans: the SBI Plot loan used to acquire the plot and the home loan you will take to build a house on the plot.

Consider the following example,

Ritesh wants to purchase a block of land for INR 30,00,000. He chooses to go to a bank and get a loan of INR 30,00,000. A year later, he plans to build a house on that site, with a building budget of INR 40,00,000. Ritesh goes back to his bank for a home loan to build his house and this time he gets a loan for INR 40,00,000. Now, he has a total loan of INR 70,00,000. Anand will not be able to claim any tax breaks for the first year. Ritesh can, however, claim a tax deduction for the total loan amount of INR 70,00,000 from the time building on his house plot is completed. 

How do I get tax breaks on a plot loan?

As noted in the preceding example, a tax benefit on a SBI Plot loan can be obtained only if a building is constructed on the plot, and even then, only after the construction on the plot is completed. However, once the building is completed, we will be able to take advantage of the tax benefits listed below.

Section 80C is a clause in the Income Tax Act of India that looks at various investments and expenditures that are exempt from Income Tax. Tax benefits on plot loans are only available if you build a residence on the property. Section 80C of the Income Tax Act allows you to deduct the principal repayment component up to a maximum of Rs.1.50 lakh per year.

You can claim a deduction under this section for the principal repayment of your plot and home loan, but not for the interest portion which is calculated on the SBI MCLR Rate of your home and plot loans. The title transfer fees for the plot and the registration fees are also included in the exemption limit if paid in the year that the home was finished. 

Tax benefit under Section 24 for plot loan: You can also earn tax benefits on the interest component of the loan under Section 24 after the house is built and you begin living there. You are entitled to a Rs.2 lakh annual deduction under Section 24 of the Income Tax Act. However, in order to do so, you must convert the SBI Plot loan into a regular home loan. This is accomplished by presenting to the bank or lender a completion certificate and an occupation certificate. The maximum deduction applicable on total taxable income under this provision is Rs. 2,00,00. 

You are also able to apply for the following additional benefits.

Deduction on interest rates: According to the Income Tax, if you buy a plot on an SBI Plot loan with the goal of building a house on that plot, you can get that plot loan at a lower interest rate. This is quite advantageous because you can avoid paying a hefty interest component on your overall payments.

The lower interest rate for pre-construction: As previously indicated, you are eligible for lower loan rates if you build a house on the plot. Exemptions are generally only available for the fiscal year in which the transaction occurs. However, in this scenario, you are eligible for a pre-construction interest reduction, which allows you to claim a reduction from before the fiscal year for the same fiscal year. The interest decrease will be provided to you in installments. However, the deduction is limited to a maximum of INR 2,00,000 and is only available if the owner or their family resides in the residence built. As a result, be clear about how you want to utilize your plot and take out a plot loan properly to reap the tax benefits on your loan.