Land Loan or Plot Loan (used interchangeably) is one of the most confusing subject for borrowers in Loan / Mortgage segment. Confusion is normally between Home Loan, Land Loan and Composite Loan. All three are different products with different features, benefits, Terms and Conditions. Unfortunately all three i.e. Home Loan, Land Loan and Composite Loan are loosely referred as Home Loan only. At macro level, Land Loan is sanctioned only for purchase of residential plot or piece of land. Composite Loan is Land Loan + Construction Loan i.e. to complete construction on plot. In most of the cases, my clients are not aware whether they have availed Land Loan or Composite Loan. A land loan can be availed only to purchase a Non-Agricultural plot or piece of land which is under Municipal / Local development authorities limit. HDFC provide land loan for residential plots outside city limits but subject to certain conditions. Composite Loan is altogether a separate topic which i will discuss in my next post. This post is dedicated to some of the most important facts related to Land Loan. As a borrower you should be aware of these facts to avoid any future shock.
7 Facts You Should Know About Land Loan
(a) Commencement of Construction: As i understand that confusion between composite loan and land loan is caused by “Construction” clause / condition attached to Land Loan. All Land Loans are sanctioned with a pre-condition that construction on the Land / Plot should commence within stipulated period. Just to clarify that in composite loan, the cost of construction is included in the loan value. Whereas in land loan, it is only pre-condition to sanction the loan. A borrower of land loan may avail construction loan in future to complete construction on plot. The catch is when you are buying a land at substantial premium then loan provider approve composite loan under the umbrella of Land Loan to increase loan eligibility. Borrower is not aware that cost of construction is included in the loan. He cannot avail construction loan in future and does not have any other option but to sell the land.
If you are not planning to construct in near future then it is advisable to opt for HDFC Land / Plot Loan. The reason is HDFC provide maximum grace period to commence construction among all loan providers. Under HDFC Plot Loan, Borrower has to commence construction on the land / plot within 5 years from the date of 1st disbursement. This period is normally 2 years with other lenders like SBI. If you are buying a plot or land for investment purpose then HDFC is best option as you can sell within 5 years and book the profits. Usually appreciation on land is higher compared to flat.
(b) Penalty for Non-Commencement of Construction: Normally lenders are not willing to approve Land / Plot Loan. Reason being, land as such is non-revenue generating asset and main concern of a lender is how the borrower will pay EMI. Secondly, Land purchase is mostly speculative in nature. In order to address these concerns, commencement clause is included in all the Land / Plot Loans. Now you must be wondering what if, i don’t commence construction within stipulated period. In this case, either of following scenario is possible
– Plot / Land Loan provider can increase your Interest Rate of Plot Loan. Normally this increase is upto 2% over and above existing interest rate.
– You may be asked to prepay the balance outstanding and close the Plot / Land Loan.
In order to avoid these penalties, it is advisable to check the grace period allowed under the loan agreement and start construction within stipulated period.
(c) Income Tax Benefits on Land Loan: This is biggest mis-conception that Land Loan is Home Loan therefore tax benefits of Home Loan are also available on Land / Plot loan. Let me clarify that Loan on plot or land does not qualify as Home Loan therefore INCOME TAX Benefits are NOT available on Land Loan. Even if you complete construction on plot / land to be eligible for Home Loan. Any interest paid before completion of construction cannot be claimed as Pre-EMI interest like Home Loan. Ironically i have to list this post under Home Loan category as readers will search for post on Plot Loan under Home Loan only :).
(d) Loan to Value Ratio: The LTV or Loan to Value ratio is normally 80% for Home Loans. The LTV for Land / Plot Loan is between 60% to 70%. Some lenders mention that they fund 80% of property value but it is based on market value assessed by them independently. For example, you are buying a plot for 40 lakh but loan provider’s assessment of market value is 30 lakh. In this case, loan provider will sanction 80% of 30 lakh i.e. 24 lakh as Land Loan. 24 lakh will be 60% of actual consideration value.
(e) Higher EMI’s / Low Loan Tenure: If you are borrowing X amount for Home Loan and same amount for land loan, the EMI will be high under land loan. Reason being, pure land / plot loans are sanctioned for short tenure. It also depend on age of borrower, repayment capacity etc. Normally land / plot loans are approved for 5 – 10 years therefore EMI is high. Rate of interest is usually same as Home Loan Interest Rate.
(f) Prepayment Charges: As Land Loan does not qualify as Home Loan therefore loan provider may impose prepayment penalty. It is always advisable to clarify the same at the time of availing Plot Loan. As i checked websites of loan providers, normally penalty is imposed on borrowers classified as “other than individual”. I am not sure how they will classify individual and non-individual. It seems they are referring to non-salaried people like self employed as “other than individual”.
(g) Legal Compliance: The legal compliance of land or plot is more complicated compared to flat. There are complexities like conversion from agricultural to residential or legal heirs issue. Secondly, in most of the states land records are not digitised therefore it is advisable to check legal compliance before buying or applying for land loan. In my post 10 points to consider before you buy land i shared how to buy a land & imp points to consider. Probability of loan rejection is high for land loan compared to Home Loan. To be on safer side, you can buy developed plot from builder preferably in gated community. It is easier to get loan on developed plot. Secondly there are some builders who specialize in plots / land. They might not be as popular as builders who are in construction business. You can identify such builders in your city for developed plot.
It is always good to be an alert investor. Before applying for land loan, you should check all details to avoid future shocks. Almost 90% borrowers don’t go through loan agreement but it is always advisable to check the terms and conditions of the agreement. I agree language used is complicated but you can always take help of a lawyer. Recently when i suggested same to one of my client, she told me that if she will go through the land loan agreement then she may not be able to avail the loan. I agree with her to some extent. For her “Ignorance is bliss” but it may prove very costly in future.
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Good Again.
And regarding the prepayment, there are no charges atleast in HDFC Ltd. But the prepayment can be done twice in a year and the minimum amount of prepayment should be 2 times of EMI atleast.
For individual category there is No prepayment penalty but for “Other than individual” prepayment penalty is applicable subject to certain conditions.
Hi Nitin,
I have taken land loan from india bulls but in PROVISIONAL CERTIFICATE provided by bank it’s mentioned as housing loan.Should i claim income tax exception on this loan ?
Thanks in advance.
It seems to be composite loan not a land loan. You may clarify from Indiabulls. You can claim tax deduction.
if i have composite loan from sbi to buy residential plot but i wish to construct on it through own resources and not getting another second loan as i am eligible to get another loan so then can we get income tax benefits on it.
regards
gopal sharma
Hi Nitin,
I am planing to take one BMRDA aproved plot in bangalore. They are saying LIC, HDFC and Axis banks are giving loans for that site. I asked for SBI and they are saying now if you want to go for SBI they will take 2 to 3 months time to aprove and we don’t have that much time to regsiter, please choose among these 3 banks for loan.
In among these 3 , whcih is preferable LIC, HDFC and Axis and can please explain me why it is better ? Which one will do legal verification strongly ?
We can say that if we get loans from banks for a property then that will be having clear titles or still some deputes we can expect ?
Please help me in this regards,
GISR
Hello Nitin Sir,
I am planning to buy residential plot in balewadi pune. It is not N.A but corporation has issued R zone certificate to it. So can bank provide me the loan for purchase of the plot, as i am planning to construct house on it
To answer this query, i need to go through your documents.
Sir,
I have purchased a plot in varanasi, 5mth back. I have to get loan on that plot and i don’t have any income proof, can i get loan on land paper.
I don’t think so.
I want to purchase R zone plot (Residential zone ) ,suggest bank is provided loan for same.
If the title is clear and all approvals are in place then you may approach SBI or ICICI Bank
Hi Nitin, That was nice article on land loan. Recently i was allotted a plot by Yamuna Expressway Authrity plot scheme by draw in sector22D. I want to apply for a land loan to pay the remaining amount. To which bank i should apply for loan
I will prefer SBI or HDFC Ltd for Land Loan.
hi Nitin , i want to buy a small piece of land in varanasi to built home over that , how can i get loan from any bank to buy land/plot ? Am a salaried employee in Software industry ??/
You can avail plot loan from SBI.
Hi
I availed a plot loan from dhfl but not getting tax exemption. Now i have completed construction on
this land. How can i get convert this loan into normal home.loqn to get tax benifits.
Please suggest.
It is not clear whether the loan is plot loan or composite loan i.e. construction cost is funded by the loan or you paid from your pocket.
Sir
I have taken plot loan and construction loan seperately from dhfl on same property.
But i am not getting tax benifits on plot loan whereas i am getting it on construction loan.
Although now construction is completed still i am not getting tax benifits for plot loan.
Please help.
As i mentioned in my post, point no (c) that you cannot claim tax deduction on Plot/Land Loan.
Hi Sir, Can Salaried Employee’s have privilege to buy Agricultural Land in India without any Agricultural History? If Yes Which Bank Provides and will NRI can Opt the Loan?
These laws vary from state to state as it is state subject. States like Madhya Pradesh allow non-agriculturist to buy agricultural land whereas states like Maharashtra prohibits the same. NRI cannot buy agricultural or farm land in India.
can I get loan on land which is not diversified yet ?
Sorry, i could not understand what do you mean by diversified.
I mean the land which is not transfer from agriculture to commercial.
You can avail loan for agricultural land but subject to terms and conditions of your state and bank.
hi nitinji
I have applied for a plot and draw preferences are based on allottee’s payment option i.e. who choose option one will be first considered in draw and rest plot will be decided by draw for those opting for option 2 and after that for option 3. these options are as follows:
The following options are available to Allottees for depositing the land premium
Option 1
100% of the total premium (including registration fee) to be paid within 60 days from the date of issue of allotment letter.
Option 2
50% of the total premium (including registration fee) to be paid within 60 days from the date of issue of allotment letter
Remaining 50% of total premium shall be payable in two equal half-yearly instalments calculated from the 61st day from the date of allotment. This shall be calculated with interest@12%p.a. on reducing principal amount at the end of half year.
Option 3
30% of the total premium (including registration fee) to be paid within 60 days from the date of issue of allotment letter
Remaining 70% shall be payable in Eight equal half-yearly instalments calculated from the 61st day from the date of allotment with interest @12% p.a. onreducing principal amount at the end of each half yearly
All payments shall have to be made within the time specified and no extension.
Now at first I thought I choose option 1 but I presume getting a land loan is difficult than a home loan. Can u suggest me which option should I go for.
Thank u
Nidhi
The choice will depend on fact whether you are availing a loan or not. As i understand you are planning to avail land loan. Therefore, firstly you need to check banks that have approved the project for land/plot loan. I will prefer HDFC or SBI.
Secondly, as i understand if the buyer fail to deposit the balance amount, the amount paid till date will be forfeited. Therefore, risk is high. You need to check your CIBIL score and other eligibility criterion before you apply for this scheme.
Lastly, you need to check the demand for this project. To me, this scheme seems to be marketing gimmick and playing with psychology of the buyers. Otherwise from scheme, you can make out that it might be in great demand. Before you apply, also check the title of the property.
thank u nitinji. Ur advice as always is very helpful. I will check with hdfc and sbi about it. the land is leasehold. let us see what bank says. thank u once again. regards nidhi
Hi Nitin,
Recently I hv purchased a plot and taken home loan from Nbfc.. they have splitted my loan in two categories LAP and homeloan.. Now I m paying EMI for two loans.. in this case I am eligible to take the tax benefits on both the loans. Or I can hv tax benefits only frm one loan… Please advice me
Rajeev
You can claim tax deduction on Home Loan. LAP is not eligible for any tax deduction.
Thanks Nitin!
Hai sir ur suggestions are very helpful,
I want to purchase agricultural land in Andhrapradesh as pvt salaried employee am i eligible ? if yes please suggest list of banks.,
Thanks
Some states prohibit purchase of agricultural land by a non-farmer. Besides this there are lot of other rules related to agricultural land. I suggest you to hire a local lawyer who can help in this regard.
I am a private employee ,can I get plot loan nd 30k salaried employee can get how much amount?
It depends on multiple factors. You may check with SBI or HDFC Ltd.
SIR WHAT WOULD YOU SUGGEST AS RESIDENTIAL PLOT LOAN TAKEN FROM SBI UNDER HOME LOAN AS ( SBI REALTY HOME LOAN ) IN THIS CASE AM I ELIGIBLE TO TAKE TAX BENEFITS ?
regards
Gopal
As i shared in my post, you are not eligible for income tax benefits on plot loan.
Dear sir, after construction on this residential plot if we construct the house out of our own resources then can we get income tax benefits on residential plot loan.
thnx
gopal
For construction from own sources, income tax benefit is not available. If you have any such plans then you can apply for composite loan to avail tax benefit. Please check my following post for more details
https://www.nitinbhatia.in/home-loan/composite-loan-two-in-one-home-loan/
Hi Sir,
Thank you for providing valuable information on land loans. I have managed to save some extra cash this year. I would like to know how should I use this extra cash:
Perform part payment for my existing home loan and reduce its tenure.
(or)
Go for a land loan to buy a plotted development in a gated community worth 20 lacs and use the extra cash that I have as down payment, purely for investment. The gated community is outside the city limits and is expected to double in value in about 7 years.
Thank you.
The answer depends if you can comfortably service 2 loans. Personally, i will prefer closing 1st loan and then go for second one.
You cannot claim any home loan tax deduction on plot loan.
it means all other chartered accountant are false only you are genius and also sbi bank saying you can avail income tax benefit under residential plot by constructing on it within stipulated time, whether you opt another loan or construct the house out of our own resources.
this is for your information
thanx
Dear Mr. Sharma, I humbly request you to refrain from making sarcastic comments on public forum. The information shared by me is correct. You cannot avail tax deduction on plot or land loan. Only in case of composite loan i.e. loan sanctioned for purchase of plot and construction is eligible for tax deduction.
Hi Nitin, thanks for the valuable information…..
what will happen after availing composite but and not interested to construct now as i am traveling to abroad.
Please check point no (b) in my post.
I have taken plot loan from dhfl. Now i want to convert my plot loan to home loan. For that how much construction on plot is needed.
Minimum constructed area should be 25% of total plot area. For example, on a plot of 1000 sq ft, the minimum constructed area should be 250 sq ft.
I have a 195 sq. meter collector NA plot in Ghulewadi village ,Sangmner tahsil, dist Ahmednagar maharashtra. Before selling plots original owner had taken construction permission for from Nagar Rachna DEpartment, Ahmednar. My plot approved construction area is 52.47 ( 1 BHK) only ground floor. I have to make new plan for construction of Two floor (i.e. Ground + 1st floor) I have know as per Nagar Rachna Dept. rules how much construction I can do on G + 1 floor. Secondly whether is it is necessary to take revised permission.
The construction area depends on the FAR in that particular area. If there an increase in FAR then only you can get permission for G+1 construction. It is necessary to obtain revised permission else the 1st floor will be illegal.
Dear Nitin Ji,
Planning to purchase a plot of 3300 sft under composite loan and build a small house there. (for the purpose of 2nd home loan). Does it have to cover an area of 25% in ground floor or is it okay to build Ground + first so that 850 sft home is built.
Thanks.
The minimum constructed area should be 25%. Therefore it can be only ground floor, G+1 or G+2 as the case may be. It also depends on the layout plan approved by the local development authority.
Hi,
I’m salaried. I’d like to take a loan to buy an agricultural land. Which bank offers the loan?. I do not have any other agri land now.
Firstly you need to check whether you are allowed to buy agricultural land in your state of residence or not.
Sir I’m planing to buy 10000 sqft agri land near to my home. I already have a agri land. My wife and I are salaried persons in private MNCs the land value is 30 lack .how I can get the loan?.so many bank site talk about agri land loan but wen I call no one giving me the correct detail
You may approach any rural or co-operative bank. Also it is advisable to visit bank branch.
sir, kindly tell me what if someone claimed home loan benefit on land loan.
You can reverse the tax benefits claimed and pay the tax along with applicable penalties.
Hi Sir,
thank you for this wonderful article. i have some doubt. i will appriciate if you help me in clarifying them.
I am a salarised person & i am planning to buy a land (1000 sq) for investment purpose for less than 5 yrs. its a project by a builder and he informed me that i can take loan for land from any bank under home loan. My friend had just brought land by getting loan from xxxx bank under home loan section which acc to builder is applicabe for tax savings. I am not going to built that plot and will be selling it to buy another flat after 4 yrs. Assuming i take loan from same bank (basically to get tax benefits) . So my doubts are:-
1. Can i claim tax deductions for this loan for both Principal & Interest.
2. If i dont claim tax benefit from it and sell it after 4 yrs , & i will use that money to buy another flat (that would be my 1st home then) so do i need to pay capital gain tax?
3. If i claim it under tax benefits and i sell it after 4 yrs then what tax penalties would be applicable (do income tax dept really track these)?
4. If i dont sell it and apply for anther home loan after yrs (that would be my 1st flat) so in what cases can i claim this new loan for tax deductions?
Thank you for your help.
1. You can claim tax benefit only if you avail composite loan. As i mentioned in my post that you cannot claim tax deduction against plot/land loan. Please check my post on composite loan
https://www.nitinbhatia.in/home-loan/composite-loan-two-in-one-home-loan/
2. You can claim home loan tax benefit and can also claim exemption from capital gain if you invest capital gain in another property.
3. Any property transaction of more than 30L and any bank transaction/s of more than 10L is reported to income tax. In scenario, shared by you, you need to pay capital gain tax irrespective it is tracked or not.
4. You can claim tax deduction on new property
Hello Sir,
Thanks for the valuable information.
I have two queries.
1. I am planning to buy a plot in GDA approved area. Only ICICI is providing land loan in this area. Now the builder who is developing the area will give me possession of the plot in two years. I checked website of ICICI, it says that in case of land loan you have to complete the construction within two years from date of first disbursement. Now the question is if i do not have possession of the land than how i will construct the property? . Or this two year duration is from possession?
2. As i am getting land loan and planning to take construction loan once i have the possession of the plot. So when i take the construction loan on the same property than i can claim tax benefit on both land loan and construction loan, if not, is there any other way by which we can convert the land loan to home loan or composite loan?
Thanks in advance
Manoj
1. I am not sure why builder need 2 years to handover a plot/land. As you only mentioned that construction should be completed within date of first disbursement. Therefore, your timeline will start with first disbursement of land loan.
2. I suggest you to avail composite loan
Sir, I have agricultural plot of 4600 Sft in Pune corporation limits. It is not a NA plot . Can I take a loan against this Gunthewari plot , even though it is not a NA plot. It is in Residential zone and NA is not mandatory for construction as per new rules . I intend to use the funds for starting a new business. Pl guide how to avail loan in this case .
You can avail loan. I am assuming your status is agriculturist/farmer.
Hello Sir,
Thank you for your valuable information on the subject.
I am a salaried person. I have purchased a plot and have availed a composite loan for house construction, just 3 months ago. This is surely a composite loan as become more clarified from your information in the post, and has helped me to understand other nity-grity in the loan. One of my biggest surprises is that I will not get any tax benefit until I complete house construction, in spite of submitting a handsome amount in the form of pre-EMI.
My other issue is that due to unavoidable circumstances occurred recently, I can not start construction of house in near future, perhaps for another 2-3 years. I have a spare plot of around same value in other town, of the loan provided to me against Plot loan. I want to re-pay the loan amount as soon as possible to avoid huge financial losses without any benefits. The loaner has a clause that the EMI will be started only after disbursing full loan amount, and any repayment greater than the EMI can only be made after 6 months of the starting of EMI. Also I have come through one term stating, “In case of plot + construction loan, if construction does not commence within 6 months of disbursement of plot loan, the same would be downsized and treated as plot loan.”
Kindly suggest a remedy to minimize loses in the deal. Thank you.
I think you are stuck with the loan. All the clauses shared are inter-linked and bank has drafted agreement quite meticulously to lock borrowers till construction is completed.
I cannot comment further as i have not seen the loan agreement.
Thank you sir..
Dear Sir,
I am planning to purchase a plot of approximately 40lacs and will start the home construction(cost 15-20 Lacs) within 1-2 months period.
So now my big question is “Can I avail tax benefits on complete value (Approx 60 Lacs).
Thank you in advance.
Rahul ji,
Your question is surely for Nitin ji, but as it has come as a comment on my query to Nitin ji, I have understood that you will get tax benefits on complete value if gone for composite loan, but the benefits will start only after you have completed the construction and bank (loaner) EMI have been started. No tax benefits could be claimed on pre-EMI. The pre- EMI is the interest amount on loan the bank starts collecting after releasing the loan, till completion of construction. This is the deduction of only interest, and the principal starts diminishing in the EMI only after completion of construction.
You have to confirm above details from Nitinji, as he will explain better than me.
Best Regards,
Lalit
I concur with Lalit :) Thanks for explaining.
Thanks..
Hello Sir,
I have to purchase 2000 sq ft land. The plot is not in municipal Corporation Area but it is NA and in R zone. Can i get loan against it? Also i want to know if i take land loan can i get tax benifit on it? or the tax benifit is available only on land+construction loan… Please guide me asap.
It seems the property is in Maharashtra. You have not mentioned the type of NA permission granted.
Hi Sir,
I have taken 20 lac loan from ICICI Bank. I had clearly mentioned to DSA that I am taking loan to purchase land and to construct the house. After 1 year I came to know that its only land loan and I am not getting rebate in tax as well. Now Bank is not helping as they are saying file came to us for land loan only. I am very dissatisfied , please let me know any option by which I can convert my land loan to home loan and avail tax rebate. is balance transfer or top up loan help in this way . Kindly suggest
You may discuss with the bank to provide loan for construction or you may explore possibility to transfer land loan from ICICI Bank to some other bank as composite loan.
Dear Sir,
Sub: Non-commencement of construction
As per my HDFC loan agreement interest rate is increased by 2% above the then prevailing applicable rate of interest if the construction is not commenced within 5 years from the date of disbursement. My Loan product name is: “Resident plot purchase loan-Variable Rate-Monthly Rest”, 15 Years loan.
Now i have the below queries:
(a) In case, if i am unable to construct during the stipulated period, then will they increase the rate of interest from retrospective effect ie. from the date of disbursement or only from 6th years onwards? This is not clearly mentioned in the loan sanction letter or loan agreement.
(b) In case, if i complete the construction say in the year 8, then will i be able to claim the tax benefit in arrears?
Thank a lot.
1. Any change in interest rate will be prospective in nature. Financial institution cannot revise interest rate with retrospective effect.
2. For land or plot loan you cannot claim income tax benefits. Please check point no (c) in the post.
Dear Nitin Ji,
I live in Lucknow. I took a loan of 10 lacs for plot purchase in April 2016 from DHFL. As far as I remember it has a 4 years construction clause.The plot falls in non-municipal area but it is expected to be notified soon as municipal area very soon. The plot size is 1200 sq ft.
(1) If I plan to construct it, say in next 1-2 years, Will you advise to go to DHFL or I can get the loan transferred to any other bank (full composite value :land+construction)? which is more cost effective?
(2) Supposedly, I construct only 700 sq ft initially, Can I get the entire loan (land purchase+ construction) converted into composite loan and get my EMIs restructured accordingly?
(3) If both loans get composited in one loan, which rate of interest may apply- plot loan or Home loan?
(4) And the final question, As the announcement made by the Prime Minister, shall I be eligible for 3% interest rate subsidy if the cost of construction remains less than 10 Lacs or so?
regards,
Manoj Pandey
Lucknow
1. It depends on your financial requirement. If you need money for construction then you may opt for composite loan.
2. Construction depends on FAR or FSI. Also it depends on the terms and conditions of the bank.
3. Home Loan
4. Prima facie YES though scheme details are not clear yet
thanks
Hi Nitin ji !
I have alloted a residential plot. For paying the dues, i am going for plot loan. Can i claim tax benefit (80c/24a) ? And if i include my father also then can we both claim tax benefits?
If no,
Then after construction loan, we can avail both loan tax benefits (home+construction) ? And one more question is when both (plot + construction) loan are running on a single property, then sec24 limit will be lifted or not ?
You cannot avail home loan tax benefits for plot/land loan. I suggest you to opt for composite loan. Please check my following post
https://www.nitinbhatia.in/home-loan/composite-loan-two-in-one-home-loan/
I parches 560sft area plot can get lone
Yes. You can avail loan.
There is no legal action but you will be charged higher interest rate. You can reply to letter and state the correct facts.