You have decided to purchase a plot or a home, but are not sure what loan will best fit you. Two different types of financial products are land loans and home loans, each with its own purpose in mind. Although the two are both provided by banks and NBFCs in India, which are regulated by the RBI, there are considerable differences in interest rates, loan tenure, tax advantages, and the eligibility parameters.
This article demystifies all that you need to know in terms of major differences and limitations to help you choose which product to use, so that you make a well-informed decision in borrowing money before going to any lender.
What Is a Land Loan and How Is It Different from a Home Loan
A land loan and a home loan might seem similar at least to the surface, yet they are used with completely different purposes and are guided by different lending standards established at the Federal level by the banks and NBFCs under the regulations of the RBI in India. A home loan is taken to purchase a complete or under-construction residential property. A land loan, also known as a plot loan, is taken to buy a piece of land on which the borrower can later build a house.
This is an important distinction since lenders do not measure risk in the same way. A built-in property holds greater immediate value as security compared to an empty plot. This is precisely why land loans exist as a separate and distinct financial product.
Key Differences Between Land Loan and Home Loan
| Parameter | Land Loan | Home Loan |
| Purpose | Purchase of residential plot | Purchase/construction of home |
| Property Type | Non-agricultural land only | Built or under-construction property |
| Loan Tenure | Up to 15 years | Up to 30 years |
| Interest Rate | Slightly higher | Comparatively lower |
| LTV Ratio | Up to 70% | Up to 90% |
| Tax Benefits | Limited | Available under Sections 80C & 24(b) |
Land loans typically carry slightly higher interest rates because lenders consider vacant land riskier than a finished residential asset. Additionally, most lenders require the borrower to begin construction within a specified period, usually two to three years failing which the loan terms may be revised.
Eligibility Conditions for a Land Loan
Not all purchases of plots are eligible for a land loan. Banks are very strict with their requirements:
- It should be non-agricultural and on the boundaries of municipal or authorised authorities.
- The title of the plot must be simple, and there should not be any legal issue.
- A land loan is not eligible for agricultural land at all.
- The borrower should, in general, be an Indian resident who is a salaried or self-employed person.
- There are those lenders who demand a construction commitment for a specific period.
In India, the NBFCs can be a little more relaxed in their eligibility requirements, but the interest rates of NBFCs can be slightly higher than those charged by the scheduled commercial banks.
Tax Benefits – What You Get and What You Don’t
This is the area where land loans fail miserably against home loans. Under the Income Tax Act:
- There is no deduction on interest paid during the land purchase stage.
- There is no Section 80C advantage of principal repayment of an independent land mortgage.
- Tax advantageous opportunities would not be realized until the building is finished and the property is a residential home.
- Home loan borrowers, on the other hand, are allowed to claim up to 1.5 lakh under Section 80C and up to 2 lakh under Section 24(b) in a year.
When Should You Choose Which Product
Select a land loan in the event of buying a plot of land now, with an idea of building in the future or in an area that is expanding but may increase costs in the future.
Select a home loan when you are purchasing an already ready property or have the need for the entire tax benefits and extended repayment period.
Conclusion
The two products fulfil different financial requirements. Borrowers can make decisions based on the understanding of their differences, being interest rates and tenure, among these factors, and tax benefits and eligibility. It is always better to shop around and compare the offers of several banks and NBFCs in India before one commits, and land must not be applied for before all the required regulations are met.
FAQs
Which is better, a home loan or a land loan?
A home loan is generally better for buying a built-up house due to lower interest rates and tax benefits, whereas a land loan is suitable for purchasing a plot to build later. Home loans offer 80-90% financing for up to 30 years, while land loans offer 70-75% financing for shorter terms (up to 15-20 years) with higher interest rates.
Can we convert a land loan to a home loan?
Yes, a land or plot loan can typically be converted into a home loan once construction begins. By submitting a construction completion certificate and an occupancy certificate to the lender, the loan is often converted to a, often lower-interest, home loan, allowing for tax benefits under Section 24 of the Income Tax Act.
What type of loan is best for land?
A Plot Loan (or Land Loan) is typically the best option for buying land, offering secured financing with tenures up to 15 years. These loans are specifically designed for purchasing residential plots or land to be developed later, usually covering 70-75% of the property value, with options for both direct allotment and resale plots.
Disclaimer: The information provided on this website is for general informational purposes only and should not be considered financial or legal advice. Please consult with a qualified financial advisor before making any decisions.
