Planning a home makeover before the New Year? Here’s when a remodelling loan makes sense
Those considering a renovation loan should note that while it helps old-regime taxpayers preserve savings, the interest deduction is capped at ₹30,000 a year
Sugata Dasgupta (name changed) bought an apartment in 2017 with a home loan. After closing the loan in 2023, he now wants to upgrade the family kitchen and needs about ₹3 lakh. He’s unsure whether to take a home-improvement loan or use his savings. Which option makes better financial sense?
People who prefer to keep their savings intact for emergencies or investments, and who are opting for the old tax regime, may find a home-renovation loan worthwhile, since the interest deduction can offset part of the cost. Under the old regime, interest on a renovation loan is eligible for a Section 24 deduction, but only up to ₹30,000 a year, unlike purchase or construction loans where the limit is ₹2 lakh.
Renovation loans versus fresh loans
Renovation or home-improvement loans operate differently from fresh home loans on multiple parameters. Interest rates for renovation loans are generally slightly higher than those for purchase or construction loans, as the loan is not funding a new asset but enhancing an existing one.
“The tax treatment is where the most significant distinction arises. Under the old tax regime, interest paid on a renovation loan qualifies for deduction under Section 24 but only up to ₹30,000 per year, unlike purchase/construction loans where the deduction limit is ₹2 lakh,” says Bikash Kumar Mishra, CFO, Easy Home Finance.
The new tax regime does not allow any deduction on home-loan interest or principal, which uniformly affects both fresh loans and renovation loans.
Claiming deductions after loan closure
A borrower can claim interest deductions on a renovation loan, even if the original home loan was closed several years earlier. Let us say your home loan is closed by the 15th year, you can still continue paying interest and claiming deductions on your home improvement loan.
After all, tax benefits pertain to the purpose of the new loan, not the timing of the old. “Under the old regime, the interest deduction (within the ₹30,000 ceiling) remains available for repairs or improvements,” says Pramod Kathuria, founder and CEO, Easiloan.
Again, it is important to remember that under the new regime, these are removed altogether, so the tax outcome is zero, irrespective of earlier loan closures.
Choosing a loan or personal savings
The borrower's cash flow and tax situation will determine the choice. People who want to keep cash on hand for emergencies or investments and who are choosing the old tax regime, where the interest deduction helps with some of the costs, may want to get a remodelling loan.
For debtors under the new tax regime, there are no deductions; therefore, the computation is based just on interest. “In such cases using savings may be more economical if the borrower has adequate liquidity and doing so does not affect their financial security. On the other hand, if savings are tied to long-term investments that make a lot of money, a remodelling loan may still be a viable option even if it doesn't come with tax benefits,” says Kumar.
“Using savings is advisable only when your investments earn higher interest. Also, take a home improvement home loan when interests are low or cash flow matters,” says Atul Monga, co-founder and CEO, BASIC Home Loan.
Documentation needed for renovation loans
Once the original home loan is fully paid, procuring a renovation loan becomes simpler. “Creditors rely on clear proofs like NOC forms and title deeds. Past loan records help in establishing repayment discipline, often bettering pricing by 20 to 30 bps. However, it’s important to have an active mortgage, as lenders may ask for a fresh valuation,” says Monga.
Also Read: Hidden costs of home buying: What you need to know before you sign on the dotted line
From a process standpoint, renovation loans are usually lighter on documentation compared to fresh home loans because valuation and legal checks are simpler when the borrower already resides in and owns the property.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
