Financial emergencies do not always come with a notice. If you need additional funds to tide over a crisis and you already have an ongoing home loan, the best solution is to avail yourself of a home top-up loan or another personal loan. Top-up loans are considered as a second loan and not as multiple loans on a single property. They are popular in times of crisis since they have lesser interest rates and both their principal and interest amounts are tax deductible under sections 80 C and 24 of the Income Tax Act.
A home top-up loan is a loan that is taken on top of an existing home loan to pay for construction or repairs or used for other purposes. While some lending institutions specify that a home top-up loan cannot be used for purposes other than repairing their houses, some banks do not have such restrictions.
Benefits of availing of a home top-up loan
- Lower interest rates
Top-up loans tend to have a lower rate of interest, as compared to other personal loans. Hence, it is a favorable option to choose in emergencies. Some banks and NBFCs also offer a longer tenure for top-up loan repayments, so you have to pay smaller monthly installments and you can enjoy the tax benefits for a longer period.
- Can be used for personal or business purposes
You can use top-up loans for construction and repairs in your self-occupied house or use them for any other purpose. It is solely your discretion.
- Quicker loan sanctions
If you fit the criteria and have an excellent history of paying your monthly installments on time, you will have no trouble availing of a home top-up loan.
Tax benefits of availing of a home top-up loan
You can avail of tax benefits on a home top-up loan only if you use it for house construction or repair purposes. For example, if the home top-up loan is taken on a self-occupied house, only INR 30,000 can be deducted from the net tax amount. On the other hand, if the top-up loan is taken for a let-out property, there is no maximum limit to the tax deduction amount. However, under section 24 B of the Income Tax Act, a person can avail of only up to INR 2 lakh per annum tax deduction on home loan interest.
If the top-up loan has been used to buy a new house, you can avail of INR 1.5 lakh per annum for the principal payment of your home loan, including stamp duty charges and registration costs, as stated under Section 80C of the Income Tax Act. These benefits are only applicable after the time of possession. You cannot avail of such benefits if you have taken loans from family or friends. Also, you cannot sell this property for up to 5 years from the time of possession to claim this tax deduction.
Under section 80 EE, you can avail of up to INR 1.5 lakh per annum over and above the 2 lakh deduction on the interest component of a home loan. The value of the property must be less than 45 lakh rupees to claim these benefits. However, if the home top-up loan has been used only for construction and repairs, the tax deduction is only applicable to the interest amount and not to the principal.
Eligibility criteria to avail of a home top-up loan
The eligibility criteria differ from every lending institution to the other. However, there are a few important factors that banks and NBFCs check before giving you a home top-up loan.
- You must be above 21 years of age and a citizen of India to avail of a home top-up loan. Both salaried and non-salaried individuals can avail of home top-up loans.
- You must have had no EMI bounces in the previous year. If you had any EMI bounces, they must have been cleared within the next due.
- Banks and NBFCs will check if you have paid the existing home loan EMI amounts.
- There should not be any gaps in your current home loan monthly repayment for at least six months.
- If you want to combine your home top-up loan with balance transfer home loans from other banks, at least one year of continuous payment history is crucial.
When you are availing of a home top-up loan over an existing home loan, make sure to check the interest rates properly. Fixed home loan rates do not always remain steady for the entire tenure. Top-up loans can be paid without penalty, no matter the loan facilitator. However, you will lose a huge chunk of your savings and miss tax benefits if you pay it upfront. You will not be able to enjoy the tax benefits if you are struggling to pay the monthly installments. It is best to consult an expert finance professional from Andromeda, the digital branch of Andromeda Loans, to help you understand the implications of taking a second loan.