A plot loan is a loan given by a bank to those borrowers who want to buy a plot of land on which to build their home. Though getting a plot loan in your hometown or a nearby location is possible, there are certain conditions and nuances of the SBI plot loan interest rate you must meet and understand if you do so.
What exactly is a plot loan?
The maximum amount you can borrow to buy a plot is determined by your income as well as the value of the land. Banks offer loans which are usually in the range of 50 to 80% of the plot’s value. So, if the property is worth 10 lakh, you can get a maximum loan of 8 lakh and must contribute the rest from your own funds. The term of such loans is approximately 10-15 years, and the SBI plot loan interest rate charged is the same as home loan rates, which vary between lenders. And one must know that there is no income tax benefit for a plot loan.
What are the circumstances that you must know beforehand?
You must build a house on the plot for which the loan was obtained within a set time frame, which is usually two to three years.
Furthermore, the constructed area must be at least 25% of the total plot area. Even if you acquired the plot through a development authority plotting scheme, you must build at least 25% of it within two to three years.
What would you do if you don’t build a house?
If you are unable to complete a house within the time frame specified, banks typically charge a penalty SBI plot loan interest rate of 2-3% above the contracted housing loan rates.
Furthermore, banks may reduce the loan repayment period, increasing the burden of equated monthly instalments (EMIs) on you. If you do not repay the EMIs, the bank may forfeit the plot for which the loan was obtained.
One must understand that the authority has a power to claim your plot if not the house has been constructed after 12-15 years.
What are your options?
You can obtain another home loan to build a house on the same plot and both loans would run concurrently in such cases. However, keep in mind that if you already have a home loan, your repayment capacity will be reduced, and thus the home loan you get for building a house may be limited.
Tax Benefits of Plot Loan to Know
Many people wonder if tax benefits are available for plot loans. While there is no definitive answer because it depends on what the buyer or borrower wishes to do with the plot purchased by them. It is broadly classified into two categories:
- If you buy a plot and don’t want to build anything on it and just want to sell it for a profit in the future, you are not eligible for any tax benefits.
- However, if you buy a plot of land to build a house or any other structure, you are eligible for tax benefits. The tax benefit applies to both types of loans: the plot loan which you used to purchase the plot and the home loan which you used to build a house on the plot.
Through the following example, you will be able to understand the tax benefits one can avail of.
Krishna wishes to purchase a plot of land for INR 40,00,000. He decides to go to a bank and get a loan of INR 40,00,000. After a year, he decides to build a house on that plot, with a construction budget of INR 50,00,000. Krishan goes back to his bank for a home loan to build his house, and this time he gets a loan for INR 50,00,000. Now, he has a total loan of INR 900000. He will not be able to claim any tax breaks during the first year. He can, however, claim a tax deduction for the total loan amount of Rs. 70,00,000.
A tax benefit on a plot loan can be availed only if a building is constructed on the plot. Even after that, the construction on the plot has to be completed for you to take the benefits of tax. However, once the construction is completed, you will be able to take advantage of the tax benefits listed below.
Section 80C tax deduction: Section 80C of the Income Tax Act of India examines various investments and expenditures that are exempt from Income Tax. You can claim a deduction under this section for the principal repayment of your plot and home loan, but not for the interest portion of your home and plot loans. This allows you to deduct up to INR 1,50,000 from your annual taxable income. The title transfer fees for the plot and the registration fees are also included in the exempted limit if paid in the year that the home was completed.
Section 24: Section 24 of the Income Tax Act states that once the home is completed and you have occupied it, you can deduct the HDFC plot loan interest rate component of your plot loan. However, in order to take advantage of this benefit, you must convert your plot loan into a standard home loan. This plot loan-to-home loan conversion is simple and can be obtained upon completion of the house construction on the plot. This is accomplished by submitting to the bank or lender a completion certificate and an occupation certificate.
The maximum deduction applicable on total taxable income under this section is Rs 2,00,000, and INR 1,50,000 if you missed filing returns for the year and are now filing them, and if the house owner and/or his family reside in the newly constructed home. However, if the constructed home is rented out, the entire HDFC plot loan interest rate is forfeited.
Deduction in your Interest rate: According to the Income Tax Act, if you buy a plot on a plot loan with the intention of building a house on that plot, you can get that plot loan at a low SBI plot loan interest rate. This is extremely advantageous because you can avoid paying a high-interest component on your total repayment.
Pre-construction interest rates are lower: As previously stated, if you build a house on the plot, you will be eligible for a low SBI plot loan interest rate. Exemptions are normally only available for the fiscal year in which the transaction occurs. However, in this case, you are eligible for a pre-construction HDFC plot loan interest rate deduction, which allows you to claim a reduction from before the fiscal year for the same fiscal year. The HDFC plot loan interest rate deduction will be provided to you in instalments. However, the deduction is limited to a maximum of Rs. 2,00,000 and is only available if the owner or their family resides in the home built.