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Top-up loans, tax deduction benefits

Top-up loans are available to existing customers with a home loan. Tax deduction benefits are available on the top-up loan for the interest portion under section 24.

Pooja Gawde

21 Apr 2008

A top-up loan is one that can be taken on an existing home loan from a bank based on your income and repayment capacity. Most banks offer top-up loans readily to their existing customers. However, if there are instances of irregular loan repayment and cheque bounces, this facility may not be available to you.

While most banks and other lending institutions offer up to 70 per cent of the market values of the property as a top-up loan.

The banks may charge a processing fee for the loan.

The bank does not monitor the utilization of the loan, unlike a home loan. This means that the loan can be used to pay off another loan, meet the increased EMI due to increase in interest rates or even for your personal needs. These loans are cheaper compared to personal loans.

The interest rate on a top-up loan is usually just 100-150 basis points (1-1.5 per cent) more than the interest rate on home loan.

Interest rates on personal loans are as high as 15 per cent or more, depending on several factors.

Loans against securities like NSCs mutual fund units, shares and jewellery also have comparatively higher interest rates.

One disadvantage with a top-up loan though is that tax benefits are not available for such loans unlike those available for a home loan.

However, you can get tax deduction benefit on the top-up loan if you have receipts/documents to prove that the loan taken has been used for acquisition/construction/repair/renovation of a residential property.

The tax benefit is available only on the interest portion of the loan under section 24.