Need funds for a major expense but don’t want to sell your property? A Loan Against Property (LAP) can help you unlock the value of your existing real estate while retaining ownership. Whether it’s for business expansion, higher education, or medical emergencies, LAP offers substantial funds at a competitive interest rate. Depending on how you use the money, you may be able to claim deductions under the Income Tax Act, 1961, and pay less tax altogether.

In this guide, we’ll explain which tax sections apply, how much you can claim, and the conditions that decide whether you qualify. 

What Is a Loan Against Property?

A Loan Against Property (LAP) is a secured loan where you pledge a residential, commercial, or industrial property as collateral in exchange for funds from a bank or NBFC. Since the lender holds the property as security, interest rates on LAP are typically lower than those on unsecured personal loans. Also, the loan amounts can run higher, often up to 60-70% of the property’s market value.

A home loan and a loan against property are entirely different. A Loan Against Property comes with no end-use restrictions. It can be used for business expansion, a child's higher education, medical emergencies, debt consolidation, or even funding for another property purchase. This is its main flexibility, and it also conveys why tax treatment isn’t as simple as availing the loan and paying interest.

Can You Claim Tax Benefits of a Loan Against Property?

Simply taking a Loan Against Property does not make you eligible for tax deductions. The tax treatment depends entirely on how you use the borrowed funds. If the loan is used for eligible property-related purposes, Section 24(b) may apply. If it is used for business purposes, deductions may be available under Section 37(1).

The tax benefit on a Loan Against Property depends entirely on what you do with the money, and not on the fact that you took the loan. 

Section 24, Clause (b): When the Loan Is Used for Property-Related Purposes

If you use your Loan Against Property to purchase, construct, repair, renovate, or reconstruct a residential or commercial property, the interest you pay can be claimed by the eligible owner who satisfies the conditions under Section 24, clause (b).

Know the following conditions under the property:

  • Self-occupied property: The interest deduction is capped at ₹2 lakh per financial year, and this benefit is available only under the old tax regime.
  • Let-out (rented) property: There is no specific cap on the interest of deduction for a let-out property under Section 24(b), clause (b). The entire interest amount can be set off under the head “Income from House Property”.
  • Construction timeline: If the loan funds construction or purchase, the project generally needs to be completed within 5 years from the end of the financial year in which the loan was taken. Otherwise, the deduction amount will be reduced.
Note: Section 24, clause (b) applies per individual, and not per property. So, if you've taken a joint Loan Against Property with a co-owner, each of you can claim deductions individually, subject to the respective caps. This effectively doubles the household's claimable benefits in many cases. 

Loss set-off limit (Section 71): If the interest deduction results in a loss under "Income from House Property," only up to ₹2 lakh of that loss can be set off against other income streams, such as salary, in the same year. The Income Tax Department confirms that this loss can be carried forward for up to 8 assessment years if it isn’t fully absorbed.

Section 37(1): When The Loan Is Used for Business Purposes

If the loan is used exclusively for business purposes, the interest paid and certain finance-related expenses, such as processing fees, may typically be claimed as business expenditure under Section 37(1), subject to applicable tax provisions.

The following are the conditions of section 37(1):

  • No upper limit: If the expense is genuine, ordinary, and incurred wholly for business purposes, there's no fixed ceiling on how much interest can be deducted.
  • Reduces taxable business profit: This is beneficial for self-employed professionals and business owners who utilize LAP funds in their enterprise.
  • Only the interest and associated charges qualify: Since taking a Loan Against Property (LAP) is treated as a capital transaction under Section 37(1), only the interest and finance-related charges are deducted and not the principal.

Note: To claim this benefit, you must be able to demonstrate that the loan funds were used for business purposes. Supporting documents such as invoices, bank statements, and proof of loan utilization can help substantiate your claim if it is scrutinized.

Comparison of How the Benefits Change by End- Use

The tax benefits aren’t the same for every borrower. The applicable deduction limit and conditions depend on the purpose for which the loan amount is used. Here’s a quick comparison:

End-Use of LAP Funds Applicable Section Deduction Limit Notes 
Purchase/construction of self-occupied property Section 24(b) Up to ₹2 lakh/year Old tax regime only 
Purchase/construction of let-out property Section 24(b) No upper limit Loss set-off capped at ₹2 lakh against other income 
Repair/renovation of property Section 24(b) Up to ₹2 lakh/year (interest only) Principal repayment not eligible under 80C 
Business expansion/working capital Section 37(1) No fixed limit Interest and fees deductible as business expense; principal excluded 
Personal use (wedding, travel, etc.) None Not applicable No deduction available 

**The features, application process, and all other information specified above, including rates, prices, and other critical information, are as of the date this page was created and are subject to change. Contact the relevant authority or visit their official website for accurate information.

Why New Tax Regime and the Old Tax Regime Matter?

Since the new tax regime is now the default option for most taxpayers, this distinction has become more important than ever for anyone evaluating Loan Against Property tax benefits:

  • Old regime: You can claim the interest deduction on a self-occupied property under Section 24(b), up to ₹2 lakh per year. You can also use any loss from house property to reduce your salary income (up to the ₹2 lakh set-off limit under Section 71).
  • New regime: You cannot claim a home loan interest deduction for self-occupied property. If your property is rented out, you can still deduct the interest; but only against the rent you earn from it. You cannot use that loss to reduce your salary or any other income.

If you want to claim a deduction on LAP interest in a self-occupied property, the old regime is typically the only way to keep that benefit alive. Yet, a calculation by a tax professional for your regime's choice is better informed by your overall income profile.

Documents Required to Claim the Deduction

You should have the following documents ready to support your claim if the Income Tax department asks during assessment:

  • Interest Certificate: You will be required to produce the interest certificate from your Bank or NBFC, which clearly states the interest paid during the financial year.
  • Loan Sanction Letter & Agreement: This document shows the purpose for which the loan was disbursed.
  • Proof Of Fund Utilization: This is particularly important if you are claiming under Section 37(1) for business purposes. This must be presented on your behalf to prove that the money was used for the business.
  • Property Ownership Documents: This is necessary if you are claiming under Section 24(b).
  • Completion Certificate: This is only relevant for property under construction. This confirms that the construction is being finished within the specified 5-year, timeline required to claim the full Section 24(b) deduction.

On the other hand, if you’ve bought a ready-to-move-in property, this document doesn't apply to your ownership papers, and proof of possession takes its place instead.

Common Mistakes Made by Borrowers

A few patterns show up repeatedly when borrowers try to claim LAP tax benefits incorrectly:

  • Assuming Section 80C Applies - For a Loan Against Property, principal repayment is never eligible under Section 80C, unlike a regular home loan.
  • Mixing Fund Use Without Documentation - If the loan is used partly for business and partly for personal purposes without clear tracking, the entire claim can become difficult during verification.
  • Ignoring The Regime Impact - Calculating the expected deductions under the old regime, then filing under the new regime by default, leads to losing the benefit entirely.
  • Missing The Construction Deadline - By letting the 5-year construction window lapse, your claimable interest amount will be reduced.  
  • Overlooking Joint Ownership Benefits - The ₹2 lakh deduction limit under Section 24(b) applies per person, and not per property. Not structuring the loan and property ownership jointly, which could have doubled the household's deduction limit.

For example, if the loan and property are held jointly by you and your spouse, then each of you can separately claim up to ₹2 lakh in interest deduction, doubling the household's total claim up to ₹4 lakh.

Conclusion

A Loan Against Property (LAP) can be far more than a quick way to access funds against your real estate to be used to reduce your tax payable. But the benefit is not direct. It depends entirely on what the money is used for, which tax regime you operate under, and how well you document the fund utilization.

Before you assume that the deduction applies, know your loan's end-use against Section 24(b) and Section 37(1), check which regime works in your favour, and arrange your documents accordingly. If you’re still unsure, you can consult with a chartered accountant before filing. This can save you from either underclaiming a benefit you're entitled to or overclaiming one that raises scrutiny.

Frequently Asked Questions

1. Can I claim tax benefits on a Loan Against Property used for my child’s education?

No, you cannot unless the education-related expense is somehow tied to property construction or business use. Note that this is separate from an actual education loan. The narrow exemption applies if you run a business and pay for an employee’s job-related training directly as a business expense.

2. Does taking a Loan Against Property affect my eligibility for home loan tax benefits?  

No, the two are evaluated independently. However, if you have a home loan and later take an LAP to finance additional work on the same property, keep track of your claims. The combined claim must stay within the Section 24(b) limit for that property.

3. Can self-employed individuals and salaried employees both claim these benefits?  

Yes, but the application differs. If you’re a salaried individual, using LAP funds for property purposes is typically claimed under Section 24(b). On the other hand, self-employed individuals and business owners who use funds for business purposes, claiming under Section 37(1).

4. Are there any GST benefits available on a Loan Against Property?

No, a Loan Against Property is a financial transaction. It is neither a supply of goods nor a supply of services, so there's no GST benefit to be claimed in either case.  

5. Can I claim tax benefits if the loan is taken against a commercial property?

It matters how the loan money is used. If you use the loan for business expansion, the interest can be claimed as a business expense under Section 37(1), regardless of whether the mortgaged property is residential or commercial.  

 

Disclaimer: This page includes information that has been compiled from many sources and is only offered for informational purposes. Given that this type of data may change over time, we cannot guarantee the accuracy of the information supplied or included within it. It is anticipated that the user will confirm with the relevant source before making any choices or taking any actions.