Home loans have become a preferred option for many homebuyers to fund the purchase and construction of homes. The ease of availing, lower rate of interest, and tax benefits offered on home loans make it a go-to financing option for many. Owing to the growing popularity, many home loan borrowers are also opting for a top-up on their home loans to meet the additional housing expenses, fund their urgent or aspirational needs.

So, what are top-up home loans, and how can one claim tax benefits on top-up home loans? Let’s understand.

What are top-up home loans?

Top-up home loans are a type of home loan that is offered only to existing home loan borrowers. The sum loaned is over and above the sanctioned home loan amount, and is used to meet the additional expenses incurred in home purchase or construction. The top-up home loan amount is primarily used for the purpose of house renovation and repair.

The top-up loan amount is approved by banks or NBFCs shortly after scrutinizing the financial status of the borrower. However, you should note that the rate of interest on a top-up home loan may be different than the original home loan issued.

How does Top Up Home Loans work?

The top-up home loans can be availed on existing home loans or loans against property. The additional amount is approved only when EMIs on an existing home loan are paid on time and there are no instances of missed payments.

A top-up home loan can be taken from the existing lender or from another lender when you refinance or balance transfer your home loan.

Tax Benefits on top-up home loan

The top-up home loan tax benefits offered are different from tax benefits on home loan loans.

For example, the maximum deduction on interest payments allowed on a home loan is Rs 2 lakh, whereas on the top-up home loan, the maximum deduction allowed is Rs 30,000. However, there is one condition to the tax benefit. The Rs 30,000 tax benefit can only be availed on a self-occupied house property. If the top-up home loan amount is used on let-out property, there is no limit on the deduction that can be claimed.

Additionally, the borrower has to prove that the top-up home loan amount availed of is used in the repair, renovation, or extension of the house property.

Tax benefits on the repayment of the principal amount are subject to a few conditions. For instance, if the principal amount is used for the construction of new house property or purchase of new house property, then deductions can be claimed under sections 80C and 24 (b) of the Income Tax Act.

If the total interest payment (home loan and top-up home loan) exceeds Rs 2 lakh in a financial year, you can carry forward and claim deductions for up to 8 years.

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If the amount is used in the repair and renovation of the house property, then no deductions can be claimed on the principal repayment.

Do's and Don'ts to claim the Deduction

While claiming for tax exemption on top-up on home loan, you need to be careful of the do's and don’ts.

• You can claim a tax deduction on interest payments even if you have missed the actual payments. Section 24 of the Income Tax Act mentions the term “paid or payable”, which means the due interest payments. However, it is advisable to maintain all records of the usage of top-up home loans safely to avoid any future complexities. It is also strongly advised to never miss a single EMI repayment, since it will add to your debt, reduce your credit score, and require additional taxes to be paid during investment proof submission or ITR filing.
• If the top-up home loan amount is used for any other purpose like meeting children’s education expenses, vacation, etc., no tax deductions will be allowed.

Things to note before applying for a top-up home loan

• Before applying for a top-up home loan, you must fully assess your income and repayment capacity to reduce the chances of rejection
• Lenders usually advance up to 70-75% of the value of the house as a home loan. Therefore, the maximum amount you can avail of as a top-up home loan is the current market value of the property minus the outstanding loan amount
• Your top-up home loan application will be rejected if you have defaulted on any of your loans in the past or have a poor credit score.

Conclusion

One of the biggest advantages of a top-up home loan is you can use the amount as per your requirement and there is no restriction on the end usage of the loan amount. However, to avail of a home loan top-up tax benefit, you need to use it for the purpose of construction and the purpose of residential house property. With SMFG Grihashakti, eligible borrowers can avail of a top-up home loan with minimum documentation, low processing fees, along with attractive interest rates.