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Both housing loan and land loan are availed to acquire a property. However, home loans are availed for properties that are already constructed, are under construction or will be constructed in the near future. But if you are looking to purchase land – whether to build a house or purely for investment purposes- you may not qualify for a home loan, but will have to avail a land loan instead.
While the application processes, terms and conditions as well as tenure of home loan and land loan are similar, there are some fundamental differences between the two in terms of eligibility, rules, tax implications, etc.
Home Loan Purpose and Eligibility
As mentioned above, a home loan is granted by a bank or an NBFC to purchase a house that is already constructed, under construction, or has been approved for construction in the recent future. Home loans are available on all approved properties irrespective of their location or size. On the contrary, a land loan can be availed to fund the purchase of a vacant plot of land that is:
- Residential
- Non-agricultural
- Non-commercial
- Within municipal/corporation limits
- Not in an industrial area
- Not located in a village
Land loans, also known as plot loans, are provided by banks and NBFCs to salaried and self-employed Indian residents above 21 years of age who have a good repayment history. Resident Indians can take land loans either to buy land as a future investment or to construct a home on it at a later date.
Loan for buying land is usually offered by a lender only if the borrower has definite plans to construct a house on the land within a given time frame. After the construction is complete, the completion/occupation certificate needs to be submitted to the bank to convert the land loan into a regular home loan. This will allow the borrower to avail the applicable tax benefits on home loan. As per current regulations, land loans do not qualify for tax benefits. In case of Non-Resident Indians (NRIs) most banks do not easily grant land loans as there are a number of government regulations in place. In the rare cases that they do, the land loan interest rates will be much higher than those offered to resident Indians. But almost all lenders provide Home loans to NRIs.
Loan for buying land is usually offered by a lender only if the borrower has definite plans to construct a house on the land within a given time frame. After the construction is complete, the completion/occupation certificate needs to be submitted to the bank to convert the land loan into a regular home loan. This will allow the borrower to avail the applicable tax benefits on home loan. As per current regulations, land loans do not qualify for tax benefits. In case of Non-Resident Indians (NRIs) most banks do not easily grant land loans as there are a number of government regulations in place. In the rare cases that they do, the land loan interest rates will be much higher than those offered to resident Indians. But almost all lenders provide Home loans to NRIs.
Home Loan-To-Value Ratio
Loan-To-Value (LTV) is the quantum of the loan that borrowers are permitted to take for property purchase.
For home loans, borrowers get up to 80% of the home value as a loan. In case of a land loan, LTV is specified at a maximum of 70% of the plot value in urban centres, whereas in smaller towns/cities, the maximum LTV ratio is fixed at 50% to 60% of the total cost of land.Hence, if an individual wants to buy a plot of land by availing a land loan, he/she has to pay anywhere between 30-50% of the plot cost as down payment along with some out-of-pocket expenses.
For home loans, borrowers get up to 80% of the home value as a loan. In case of a land loan, LTV is specified at a maximum of 70% of the plot value in urban centres, whereas in smaller towns/cities, the maximum LTV ratio is fixed at 50% to 60% of the total cost of land.Hence, if an individual wants to buy a plot of land by availing a land loan, he/she has to pay anywhere between 30-50% of the plot cost as down payment along with some out-of-pocket expenses.
Maximum Amount of Land Loan
Most banks have an upper limit on land loans. For instance, Punjab National Bank and Indian Bank offer land loans for maximum amounts of Rs. 50 lakhs and Rs. 1 crore respectively and other banks have similar limits that vary on the basis of locality and other factors.
It is advisable for a borrower to check with various banks about the upper limit of the land loan amount before short listing any lender, because this might impact their finances considerably, particularly if they are seeking large loans to invest in real estate.
Land Loan Interest Rate and Processing Fee
The interest rates charged by lenders on home loan and land loan are similar. However, home loan interest rates are usually a few basis points (100 basis points=1%) cheaper than land loans. There could be some minor differences as per the borrower’s profile. Also, both types of loans charge additional processing fee.
Land Loan Tenure
Home loans have a higher tenure in comparison to land loans. Usually, tenure for home loans can go up to 20 years (even 30 years in some cases) but the maximum tenure for a land loan is 15 years. Some NBFCs offer 20-year tenure for land loans. However that’s more of an exception than the norm.
Tax Benefits on Land Loan
Home loans qualify for tax deduction on payment of the principal amount (under Section 80C of the Income Tax Act) as well as the interest component (under Section 24(b) of the Income Tax Act).
However, even though a land loan is often treated as part of the home loan offerings bouquet of banks, borrowers are not eligible for income tax deductions on repayments made for a land loan. Though, a few exceptions do exist. If house construction is started on the purchased plot the borrower qualifies for tax benefits for that part of the loan, which is termed as a home construction loan. The deduction in this case is applicable only for the loan amount taken for construction purposes and the tax benefits are applied only after completion of the construction activity.
Documentation for Land Loan
In case of either loan, borrowers need to submit the following key documents to the bank:
- Identity and address proofs
- Salaried individuals have to submit copies of their salary slips as income proof
- Photocopies of the last six months’ bank statements, in which salary credits can be seen.
- If self-employed, last 3 years’ acknowledged IT returns along with sales receipts need to be submitted as income proof.
- Proof of business continuity and copies of relevant degrees and certifications also need to be submitted.
- Borrowers also need to provide all the site ownership documents in the seller’s name, to the concerned NBFC or bank – this includes the possession certificate, no encumbrance certificate, location certificate various NOC clearances from relevant authorities, etc.
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Pre-requisites for Land Purchase and House Construction Loans
In case you opt for a refinancing option for land purchase on the condition that you will begin construction of the house soon, some prerequisites come into play. Most banks have a few preconditions regarding when the construction has to begin on the acquired land. The stipulated time frame can, however, vary from one lender to another.
For example, ICICI Bank specifies that construction must be completed within two years from the date that the first disbursement of the land loan was availed by the borrower. SBI gives land loans on the condition that the owner must promise construction of the home within two years from the allotment date of SBI Realty Loan.
Prepayment/Foreclosure
There is no penalty on the foreclosure of floating rate home loans. Yet, a land loan could attract foreclosure charges that ranges from 2% to 4% of the amount prepaid at the time of foreclosure. This is because some lenders do not categories land loan as a “home loan” with tax benefits. Borrowers should clarify the foreclosure and part-payment details of land loans with the lender before signing the loan agreement.
Compare Home Loan and Land Loan
| Home Loan | Land Loan |
| Resident Indians and NRIs with certain preconditions are eligible | Resident Indians and NRIs are eligible |
| Tax deductions are available for repayment towards home loan interest as well as principal amount | No tax deductions are available; only available for the construction year |
| Interest rate is calculated as per the base rate | Interest rate is calculated as per the base rate |
| Tenure is up to 30 years | Tenure is up to 10-15 years |
| LTV is up to 80% | Maximum LTV limit is up to 50-70% of the plot cost |
| No foreclosure charges on floating rate home loans | Foreclosure charges of 2% to 4% can apply to land loans |
Despite the aforementioned differences, the overall procedures and key requirements such as documentation required, how to calculate housing loan EMI, interest rates, bank’s due diligence process, requirement for co-applicants, etc. are the same for both home loans and land loans. The key difference is the tax treatment so take the help of a financial advisor to figure it out when you have to file taxes.
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