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Loan taken to buy land is different from one taken to buy a house

There are fundamental differences between the two in terms of rules, eligibility, taxation and so on

For many, land loan and home loan may sound similar. In fact, many lenders classify both under the head of “home loan". However, there are some fundamental differences between the two in terms of rules, eligibility and taxation, among other factors. Let us take a look at how these two differ.

DEFINITIONS

A home loan is granted by a lender, be it a bank or a non-banking finance company (NBFC), to buy a house which is either constructed, is under construction, or there is a plan for construction. On the other hand, a land loan can be availed to buy a vacant piece of land. It has to be non-agricultural land and should be within the limits of a municipality. Even non-resident Indians, whether salaried or self-employed, can opt for a land loan but they may find it difficult to get one as many lenders may not accept their application.

INTRINSIC DIFFERENCES

While both the loans can be availed to buy a property, there are some differences. Land loans usually have a lower tenor compared with a home loan. Home loans can be taken for even 30 years, whereas land loans usually have a tenor of 15 years. Some lenders, especially NBFCs, give it for 20 years. Other than this, lenders usually have an upper limit for land loans.

The other significant difference between the two types of loans is in the loan-to-value amount. While a home loan of up to 90% of the value of the property can be availed, the limit is usually restricted to 70% for land loans. This effectively means that the downpayment proportion is higher if you are buying land. However, the interest rate charged by lenders on the loan amount in both cases is similar. There may be a difference depending upon the profile of the borrower. Both loans charge a processing fee.

In terms of tax benefits, unlike a home loan, which offers deductions under section 80C of the Income-tax Act, 1961, for principal repayment and under section 24(b) for interest paid, repayments for a land loan are not eligible for any such deductions.

Also, lenders mostly only offer a land loan if the borrower plans to construct a house on it within a given time period. Once the construction is finished, the completion certificate or occupation certificate can be submitted to the bank so that the loan can be converted into a regular home loan and the borrower can avail the income tax benefit.

With regards to prepayment, though no penalty is applicable on foreclosure of a home loan, a land loan may attract a foreclosure charge as some lenders do not classify it under “home loan". Borrowers should clarify this with the lender before availing the loan.

The documentation for both types of loans is similar. However, the overall procedure of securing a land loan can be more rigorous based on the criteria under which it is approved by the lender.

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