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Top-up loans can be availed as an additional amount on your existing loan at an attractive interest rate. Such credits are ideal to meet urgent financial crisis as the approval is much faster.
Apart from providing financial support, a top-up loan also lets a borrower enjoy income tax benefits under various sections. Thus, before you plan to avail a top-up on your existing home loan, consider gathering proper knowledge on the tax benefits that you can enjoy.
Tax Benefit Under Section 24(B) of the Income Tax Act
Avail tax savings and other advantages offered by home loans by opting for a top-up loan. While you avail a home loan, you get to enjoy tax benefits under section 80C, 24 (b), etc. According to section 24(b), you can claim deduction up to Rs. 2 Lakh on the interest paid or payable. Similarly, when you take a top-up loan, you can claim deductions up to Rs. 30,000 for the same. Consider the below-mentioned example for your better understanding.
Example 1
- Tax deduction limit under section 24 (b) is Rs. 2 Lakh.
- Interest payable for the home loan is Rs 70,000.
- Interest payable for a top-up loan on the existing home loan is Rs. 20,000 (deductions allowed up to Rs. 30,000).
With the top-up loan, you can claim a tax deduction of Rs. 90,000 as interest paid in a financial year.
Example 2
- Tax deduction limit under section 24 (b) is Rs. 2 Lakh.
- Interest payable for the home loan is Rs. 1, 80,000.
- Interest payable for a top-up loan is Rs. 40,000
Thus, the total interest payable is Rs. 2, 20,000. You can enjoy a deduction up to Rs. 2 Lakh only. Therefore, the payable tax will be calculated only on the remaining amount, which is Rs. 20,000.
Consider using the top-up loan calculator while you are trying to calculate the loan amount and payable interest to get a clear idea of the tax deduction that you can enjoy.
How to Claim Such Tax Benefits
One of the essential factors that you need to know about saving tax when you take a home loan is a top-up loan. You can only enjoy tax benefits if you can prove the end-use of the top-up loan amount. If you use the amount for repairs or renovations of your home, you can claim benefits under section 24(b) against the payable interest, as discussed in the above point. To claim such benefits, you have to provide certain documents that would prove the utilization of the amount, such as receipts, bills, etc.
Also, the top-up loan interest rate is quite affordable, thereby reducing the EMI burden. Along with the top-up loan facility, several financial institution and NBFCs provide other lucrative benefits on a home loan.
To enjoy the tax benefit and other advantages that a top-up loan offers, consider paying your dues on time to avoid hefty penalties. Paying your dues on time will help you maintain a healthy credit score, which a vital component of the eligibility criteria that you have to meet mandatorily while you avail a primary or top-up loan.
Also Read: How Can You Benefit from a Top-up Loan?
