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Explained: How plot loans differ from home loans on interest rates and income tax benefits

Interest rates on plot loans are a few basis points higher compared to those on home loans

May 12, 2021 / 10:23 AM IST

The demand for plots of land has risen in this pandemic. But whether it is about buying a ready-to-move property, an under-construction apartment or a plot on which you wish to build your dream house, you may need a loan. While a housing loan is available for buying an apartment or a property, banks and finance companies offer you loans to even buy a plot. A plot loan is, however, different from a typical housing loan.

Loan for plots

Yes, you can. A plot loan is used for buying a piece of land that could be developed later for residential purposes by the borrower for self use. “Lenders offer land, construction, as well as bundled land + construction loans based on the construction cost estimate. You need to check which one you are being offered and if it is the best alternative for you,” says Adhil Shetty, CEO, BankBazaar.

But Shetty adds that most banks do not fund the purchase of agricultural land. Make sure the plot of land that you intend to buy is located within the limits of a municipality or corporation, and should not be agricultural land.

Interest, tenure and amount

Close

V Swaminathan, CEO, Andromeda & Apnapaisa says that most financial institutions consider plot loan riskier. “Interest rates for plot loans are a few basis points higher compared to those on home loans,” he says.

“The interest rate can be higher and we have seen examples of 25 basis points higher rates being charged by some lenders vis-à-vis home loans,” says Shetty.

Also, compared to home loans, most lending institutions offer plot loans for shorter periods. “The maximum tenor of a plot loan can go up to 15 years, versus 20-25 years for a home loan,” says Shetty. For instance, a plot loan from HDFC is available for a maximum term of 15 years.

Most financial institutions also cap the maximum amount of loan they can provide to purchase a plot. For instance, ICICI Home Finance offers a plot loan of up to Rs 1 crore for construction of a residential house. Typically, there is no such upper limit in the case of home loans; even in cases with limits, the cap is much higher.

Loan-to-value ratio

The Loan-to-value ratio is the proportion of the property value that a lender can finance through a loan. “While in the case of home loan, some financial institutions can offer you up to 90 percent of the property value as loan. For a plot loan, it is typically not more than 80 percent. As plot value increases, LTV ratio decreases,” says Swaminathan.

HDFC can provide 80 percent of the property cost as loan if you apply for a loan of up to Rs 75 lakh. But only 75 percent of the property cost as loan is offered if the loan amount is more than Rs 75 lakh.

The LTV ratio also depends on various other factors such as the entity from which you intend to buy the plot – an individual, a developer or government authority. “In case you buy through a government scheme, the LTV would be the highest,” adds Swaminathan. HDFC restricts the loan amount to up to 70 percent of the cost / value of the plot, if its location is off city limits.

Is it necessary to construct a house on the plot?

Typically, while signing the agreement, lending intuitions take an undertaking that construction on the plot will begin within a specific period, say 18-24 months from the date of disbursement.

“A plot loan is specially designed to purchase a piece of land for residential purposes. Most banks give 2-3 years for constructing the house. At the end of the period, you will have to present the proofs of construction to the bank. If you fail to submit, then the bank can charge a penal interest of 2-3 percent points over the contracted plot loan rates,” says Shetty.

So, lending intuitions can ask for proofs such as photographs of the construction and architect’s certificate to know the stage of construction. In some cases, banks can send representatives as well to evaluate the progress of the construction.

Tax deduction

If you intend to keep the piece of plot as it is, there is no income-tax relief. Here’s why.

Income-tax experts point out that ‘income from house property’ considers buildings or lands upon which some construction has happened. Says Vivek Jalan, partner, Tax Connect Advisory Services LLP, a multidisciplinary consulting firm, “if you keep the plot vacant, then the interest on that plot’s loan cannot be claimed as a Section 24 (b) income-tax deduction, which is available for up to Rs 2 lakh.

Also read: How taxation on housing transactions changed under the Modi government

However, if you take an additional loan to construct a house on the plot of land, then you become eligible for claiming deduction against the interest and repayment of home loan; but these too are allowed only after the construction of the property.
Ashwini Kumar Sharma
first published: May 12, 2021 10:23 am

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