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In India, investment towards building a house is not only considered crucial but it also has sentimental value. Not just ready properties, Indian investors are also very inclined towards purchasing plots. This can be done purely as an investment or for constructing the house. If you intend to buy land, you will not be eligible for a home loan. For purchasing land, you will have to avail a land purchase loan instead. You can avail loan for the purchase of land through direct allotment or it may be a resale plot.
About Loan for Land Purchase
Even though the rates, as well as the terms and conditions related to the land loan, is similar to that of the home loan, there are inherent differences between the two of them. The major differences are:
Eligibility of the loan:
A land loan is only available if you intend to take it for residential purpose and it is situated within the city/municipal limit. On the other hand, the home loan can be availed for any kind of property irrespective of the location.
Tax treatment :
A home loan offers you tax benefits for the interest as well as the principal amount. However, a land purchase offers you no such benefits. Only the loan taken for house construction is applicable for a tax deduction, but not for the land purchase.
Lower LTV :
Usually, you are eligible to get up to 85% to 90% of the loan amount in case of a home loan, but for land loans, you can get a maximum of 70% loan which means you must make 30% of the amount as down payment.
Loan Duration : The tenure for home loans are somewhere in the range of 20-30 years in, but for a loan for land purchase, the maximum loan tenure is 15 years.
NRIs not eligible for land loans :
Non-Resident Indians (NRIs) are considered as an important borrower segment in case of home loans, however, the case is different for land purchase loans. It is very difficult for NRIs to obtain a loan for land purchase in India. Most of the banks and lenders have their own policy or reservations when it comes to approving land purchase loan to NRs.
Land purchase loans are on the higher side of the risk curve. Lenders consider an undeveloped asset to be far riskier than a developed asset because the latter has faster income generating properties. You need to have a concrete set of reasons and answers as to how you want to develop this property going further. This is an integral part of the loan approval process.
Unlike the home loans, which usually have a longer tenure of say 20-30 years, a land loan has a relatively shorter tenure of say 15-20 years. The tenure of the land loan depends on the profile of the customer, his age at maturity of the loan as well as the age of property during the loan maturity.
Loans for land purchase usually have an upper limit. The maximum limit for which the loan for land purchase can be availed is decided by the risk management arm of the bank/lender. The upper limit on loan for land purchase varies across banks.
If you wish to opt for a land loan, do keep in mind, there are certain pre-requisites which you will have to observe. The most prominent clause of any land loan is that it requires the borrower to begin construction on the acquired plot of land within a specified period.
A plot or a land loan is different from a home loan, hence it is quite possible that the loan provider may levy a prepayment penalty. You must enquire specifically about this with the loan provider.
Many people indulge in land purchase for speculative purposes. However, the lenders always want to ensure that the land is used for construction purpose. In a move to address this, most of the land loans include a commencement clause. This clause ensures that if you do not commence the construction within a stipulated period, your lender can increase your interest rate up to 2% on Plot loan. You may also be asked to pay the remaining loan balance and discontinue the loan. You can avoid all these issues by ensuring the grace period allowed under the loan agreement and starting construction within the predetermined period.
Any Indian citizen above the 21 years of age can avail the loan for land purchase. The set of documents required for the same are:
For availing loan for property purchase, it is very important that the authentic documents related to the land are submitted to the lender. These documents include:
Most of the leading banks and NBFCs such as SBI, ICICI Bank, HDFC Bank, Bajaj Finserv, Indiabulls offer loan for land purchase.
1. Is a land loan different from home loan?
The land loan is different from a home loan. Land loan is used for the purchase of land or plot within the permissible municipal or city limits. This land must be used for construction purpose. On the other hand, the home loan is used for purchase for an under-construction, completed or a resale house property.
2. What is the tenure of loan for land purchase?
The tenure for the loan on land purchase ranges from 15-20 years.
3. Are NRIs allowed to avail loan for land purchase?
NRIs are not allowed to avail loan for land by leading loan providers in India. However, they are eligible for a home loan.
4. What if I don’t use the land for construction purpose?
To ensure that you use the loan for construction purpose, most banks include a Commencement Clause. Under this clause, if you do not begin the construction within a stipulated time, you will have to pay extra interest or close the loan altogether.
5. Is loan for land purchase eligible for a tax benefit?
The loan for land purchase is not eligible for any kind of tax benefit, unlike the home loan.
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