A top-up loan is a credit facility which financial institutions offer over and above an existing home loan. It is an additional credit that borrowers can opt to avail and meet their financial requirements in advance. Top-up loans are commonly used for home renovation, purchase or acquisition of a property, etc. although these loans do not come with any end-user restriction.
These loans are similar in nature to a personal loan, they do not require individuals to provide any asset as collateral. The loan quantum depends on the financial institution. In most cases, only existing customers of a particular financial institution are eligible to avail a top-up loan. However, certain financing companies also provide this credit facility on home loan transfers.
A top-up loan is also eligible for tax exemptions under the Income Tax Act, 1961. You can avail these tax exemptions in accordance with the usage of your top-up loan.
What Are the Tax Benefits Available on a Top-Up Loan?
The different tax benefits which are available on a top-up loan are discussed below –
Section 24(b)
If you use a top-up loan for home renovation or alteration, you can claim tax exemptions of up to Rs.30,000 on the interest component of your loan repayment. The limit further applies to the overall limit available under this section on interest payments. It means the interest you pay on your home loan and the interest you pay on your top-up loan is only exempt from tax up to the limit of Rs.2,00,000.
For instance, if you have paid Rs.40,000 as interest on your top-up loan and Rs.2.5 lakh as on your home loan, then the calculation for tax exemption would be carried out in the following manner –
Top-up loan interest exemption u/s 24(b) = Rs.30,000.
Home loan interest exemption u/s 24(b) = Rs. 1,70,000.
Note that, the limit is only applicable in the case of self-occupied properties.
In the case of let-out properties, the Income Tax Act imposes no limit to the amount of exemption you can avail. However, if the total interest amount you have paid in a year exceeds Rs.2 lakh, then the excess amount is carried forward to the subsequent 8 years. You can also avail tax benefits on home loan up to the amount of Rs.50,000 on the interest portion of your EMIs. You can claim an exemption under this Section if you are a first-time homebuyer.
Section 80C
You can also claim tax exemption on principal repayment of your top-up loan under Section 80C of the Income Tax Act, 1961.
However, you need to utilize the loan amount towards the purchase or construction of a house to avail such exemption. In that case, you can avail tax exemption on the principal component of your top-up loan; which in addition to the home loan principal amount shall be exempt from tax up to Rs.1.5 lakh.
In order to substantiate your claim for tax exemption for both these sections, you need to provide documents showing your expenses towards the purchase or renovation of a residential property under your name.
Benefits of a Top-Up Loan
The benefits of a top-up loan are discussed below –
- Lower interest rates – In comparison to other unsecured credit facilities, top-up loan interest rates are lower. Financial institutions such as Bajaj Housing Finance Limited offers such loans at attractive interest rates on home loan balance transfers to further convenience the borrowers.
- No documentation – As it is an additional credit facility, you do not need to provide any extra documents to avail it. Therefore, you can fulfil your urgent needs with a top-up loan conveniently.
- High loan quantum – Several financial institutions provides up to Rs.50 lakh as a loan to individuals.
- Ensure to use the top-up loan calculator before applying for it to check your EMI obligation. Subsequently, apply for quantum and tenor that would allow you to accommodate it in your monthly expenses without affecting your financial position.
