Everything You Need To Know About Plot Loans
Buying a plot is usually an expensive endeavour that requires financial assistance through a loan from a bank, housing finance company, or other lenders. A plot loan or a land loan, as the name suggests, is a type of loan provided for the purchase of a plot of non-agricultural residential land. Lenders provide these loans generally between 70% to 90% of the land value based on the region, verification of the land title documents and the borrower’s net annual income, credit history, and current debt.
This article will help you gain adequate insights if you are looking for a plot loan.
Key Features and Benefits of a Plot Loan
- Tax Benefits: Plot loans are not eligible for tax deductions if a house is not constructed on the plot. After the complete construction of a house, the principal amount of the loan paid is eligible for deduction under section 80C and the interest payment is eligible for deduction under section 24 of the Income Tax Act, 1961.
- Lower Duration: Plot loans have a lower tenure than home loans. As a result, the equated monthly instalments (EMIs) for plot loans are generally higher than the EMIs for home loans. The tenure of a plot loan depends on your age, income, and other factors such as credit worthiness.
- Interest Rate: Typically, fluctuating interest rates on plot loans may range from 7% to 13.50%. Some lenders also provide fixed plot loan interest rates.
- Joint Loan: Lenders may allow the primary borrower of a plot loan to split the EMI payments with a co-signer by taking a joint loan. The primary borrower’s loan application may also be supported by a guarantor, who promises to pay off the loan if the primary borrower defaults or even testify the credentials and repayment reliability of the borrower.
How do Lenders Calculate Your Plot Loan Amount?
Lenders perform several calculations before determining the loan amount for which you are eligible. Lenders finance up to a certain percentage of the land price depending on the following criteria:
- EMI/NMI ratio: Net monthly income (NMI) is your gross monthly income reduced by all applicable statutory deductions and taxes. Lenders rely on the EMI/NMI ratio to assess your ability to repay the loan. The standard ratio varies between lenders. For example, if your NMI is ₹60,000 and your lender is offering loans on a 45% EMI/NMI ratio, the loan amount that you would get will be based on the maximum EMI amount of ₹27,000, i.e., 45% of ₹60,000.
- Loan-To-Value (LTV) ratio: After determining the plot’s value and the maximum loan amount you are eligible for, the LTV ratio is determined. The LTV ratio of a plot is the proportion of the plot’s value that you can finance through the loan. Depending on your income, different lenders have different standards for LTV ratios. Many lenders engage a third party to do an unbiased valuation to ascertain the plot’s market value.
- Maximum amount of plot loans: According to their LTV ratio standards, lenders often give loans for 70% to 90% of the plot’s value. Therefore, you will need to cover the remaining 10% to 30% of the plot’s value along with the construction costs if any.
How to Get Tax Deductions on Plot Loans?
Tax deductions for plot loans are only available if a house is built on the plot. The tax deductions are applicable only after the construction of a house is complete. According to Section 80C of the Income Tax Act, 1961, you may deduct up to ₹1.50 lakh from the principal amount of the loan repaid each year. The interest component of the loan is also eligible for deduction under Section 24 up to ₹2 lakh each year.
However, you must change the plot loan into a home loan to take advantage of the tax deductions.
What are the Eligibility Criteria for Plot Loans?
Different lenders have different eligibility criteria for plot loans. However, the general eligibility criteria which need to be fulfilled are listed below:
- You must be a resident of India
- You should be a salaried employee or self-employed individual earning regular income
- You should be between 18 – 65 years of age
- You should have a good credit history and credit score
- Your plot should have a clear title and it should be free from litigation.
Documentation Required for Availing Plot Loans
To be eligible for a plot loan, the borrower is generally required to submit several documents, many of which have to be self-attested. A properly completed loan application is also required to be submitted along with the following documents:
- An identity proof, such as an Aadhar card, voter ID card, passport, or PAN card
- Your address proof, such as Aadhar card, or utility bills
- If you are a salaried employee, income proof such as salary slips, Form 16, or bank statements
- If you are a self-employed individual, income proof such as income tax returns, profit and loss account, balance sheet, bank statements, or certification from a chartered accountant
- Property documents, such as allotment letters, sale deed and title deed
Plot Loans vs Home Loans
Though plot and home loans have similar features, there are certain key differences between the two:
- LTV Ratio: LTV ratio is more significant for a home loan. In the case of home loans, the LTV may reach 90% for loans under ₹30 lakh, whereas it may only reach 70% for plot loans.
- Tenure: The loan tenure and EMI are critical considerations in each loan application. Compared to a loan for a plot, a home loan is issued for a longer term. Although this can vary between different banks and financial institutions, the maximum term for a plot loan may be up to 15 years, while the term for a home loan can be up to 30 years.
- Interest Rate: Rates for a home loan are lower than those for a plot loan. Hence, borrowers often consider the option of taking a construction-linked composite loan which has lower interest rates than plot loans. A composite loan requires you to begin the construction of a house on the plot within a stipulated time period. Till the time you begin construction, you are charged a higher interest rate.
A home loan and a plot loan both have advantages, but the best course of action would be to select one after assessing your needs and ability to repay. Plot loans are handy if you wish to purchase a plot of land. However, be mindful of a few factors, including the lender from which you will be borrowing money, the tenure of the loan, the interest rate, and the EMI.
Frequently Asked Questions (FAQs)
Why should I take a plot loan?
Plot loans are offered to buy plots so you can move forward with your plans to build your home. There is often no prepayment penalty and a low processing cost for plot loans. A lot of investors purchase the plot for the investment purpose.
Are NRIs eligible for plot loans?
Yes, non-resident Indians are eligible for plot loans from lenders in India. However, the plot loan can only be used to buy a plot of land for residential use and cannot be used for any other purpose.
Can I convert a plot loan into a home loan?
You can convert a plot loan into a home loan once the construction of the house is complete. You will have to submit a completion certificate to the bank. Typically, lenders stipulate a deadline by which the house on the acquired land must be constructed. Converting a plot loan into a home loan will also allow you to claim tax deductions on the principal and interest portion of the loan.