What if we told you that you can use a Home Loan to finance your long overdue home repair and even save taxes on it? Sounds too good to be true? Well, it isn’t. Whether you own a house or not, the matter of home repairs and maintenance is inescapable and is likely to put a strain on your finances. Tax incentives on Home Loan repayments may encourage people to buy a home but one can opt for a Home Loan for purposes other than buying a house, like construction, renovation, repairs and upgrade of a house. As is the case with Home Loans, not only does the home improvement loan take care of the money, but these loans come with an additional benefit-saving tax. In fact, you can avail a home improvement loan in case of an existing property or even a new house/flat that you purchased. Tax deduction rules will still hold good in either of the cases.
Zeroing in on a home improvement plan:
Although the term home improvement is slightly ambiguous, it is important to specify the scope-making a new balcony, adding a room or even a floor (as long as there is a permit for construction for extra floors), painting, re-flooring work or re-tiling of the bathroom or kitchen etc. It, however, doesn’t include buying consumer durable goods such as furniture or appliances for your home. If you’re remodelling your kitchen, a home improvement loan might cover the construction but not the appliances and kitchen cabinets.
Tax benefit on home improvement loans:
Irrespective of the expenses you incur towards the maintenance of property that you’ve rented out, you will be eligible for a flat 30% deduction on the rental income every year. However, if the property under consideration is occupied by you, no deduction will be allowed.
Home improvement costs are not treated at par with regular maintenance expenses. If you are living in the same house, it provides you with an opportunity to reduce your capital gains by claiming such charges. You will, however, need to maintain all the receipts for the same. This will bring down your capital gains tax implication greatly at the time of sale.
If you reside in this home for more than two years, then a deduction in its respect as the indexed cost of improvement will reduce your capital gains liability by the same amount.
Under Section 24(b) of the Income Tax Act of 1961, the interest on a home improvement loan is tax deductible for an amount of up to Rs. 30,000 per annum. Both the owner as well as the co-owner (if any) of the home can claim this deduction. However, this amount is considered a part of the overall Rs. 1.5 lakh tax benefit available under this section for interest paid on Home Loans.
How to apply for a home improvement loan
To apply for a home improvement loan, the following are the basic steps that you need to follow:
- Make an estimate of the amount you require for construction, repair or rework.
- Have the plan in writing and submit it to the bank.
- Generally, a bank provides 85-90% of the amount that you have listed in your plan.
- The ‘technical department’ of the lender approves the quote. It then evaluates how you can and whether you will actually be able to repay the loan amount. Thereafter, it sanctions your loan and disburses the amount.
- Sometimes, the lender may not reject the quotation but may not include certain costs either. To avoid such disappointments, ensure that you read the fine print of the home improvement loan carefully.
When it comes to doing up your home, it is prudent to avail a home improvement loan. You can claim tax benefits instead of just taking out another loan that may come at a higher cost. The rates for a home improvement loan are competitive and hence they are a viable option to consider.