A financial emergency is not something rare or unheard of. There are times in life when one needs funds urgently. This could be due to a medical emergency, an accident, or to cope with a loss in business or such other circumstances. In such situations, most of us tend to max out our credit cards or take on a personal loan with high interest rates. We may choose to break a fixed deposit prematurely, sell of our shares at values lower than we expected or redeem our mutual funds and incur losses. But all of this is unnecessary if you have a home loan.

Yes, you can get the money you need urgently simply by opting for a top up home loan on an existing home loan that you are paying off. Apart from the general benefits associated with this loan, you can even avail home loan top up tax benefit and save a lot of money. But first, let's begin with understanding what a top up home loan is.

What is a top-up home loan?

A top-up home loan is a loan offered by the same lender to their existing home loan customers. The highlight of a top-up loan is that it can be availed at much lower interest rates than most other loans, for instance, a personal loan. However, how the loan amount can be used is at the discretion of the lender. For example, some lending institutions offer the top-up loan only for specific purposes such as home renovation or for conducting necessary repairs in the house. Other lenders are more flexible in disbursing this loan and it can be used to finance anything; be it your children's education, wedding or even a vacation for yourself and so on.

When you apply for this loan, your lender essentially adds the new loan amount to your existing housing loan. It is advisable to opt for a top-up loan from the lender who has offered the home loan to you in the first place. That said, the lender will approve your request for a top-up loan only if you can provide good credit scores and have a regular payment record on your existing loans, especially the home loan. Lenders approve top-up loan requests of those borrowers who have made regular payments on their loans for the minimum number of instalments as required by them, which is typically one full year of consecutive payments.

Tax benefit on home loan top up

Before taking out a top-up home loan, many borrowers seem to ask the same question, is tax benefit available on top up home loan? The answer to this query is yes, there are! Let's take a look at them.

When you pay off a personal loan, a loan against credit card or even a gold loan, you do not qualify for any tax benefits on repaying the interest and principal loan amounts on such loans as per the provisions of the Income Tax Act. However, if you take a top-up loan on your existing home loan, you can avail tax benefits on both, the principal amount component of the loan and the interest, depending upon how you intend to use the funds.

If you use the funds from the top-up home loan to repair your home, renovate it or even make some alterations on your property, you can avail tax deductions on the interest paid as per Section 24b.

The principal amount and the interest repaid are also eligible for tax benefits under both, Section 80C of the Income Tax Act as well as Section 24b, respectively, if you use the funds from the top-up loan to construct or even purchase a new property.

The total deduction allowed on payment of the interest component, against the top-up home loan taken for home repairing, renovating or making alterations is capped at ?30,000. This deduction on interest is within the total eligible limit of ?200,000. Let us look at this with the help of an example:

Let's say Mr. Pratik Shah pays an interest of ?32,000 on his top-up home loan; then he is allowed a maximum deduction of ?30,000 on this amount. Now, if he is also paying a regular home loan and has paid interest on it, that amount will be deducted from the balance amount of ?170,000, (?200,000 minus ?30,000). As we mentioned above, the total deduction on the interest component on the home loan and the top-up home loan is ?200,000 in a financial year.

It should also be noted that Mr. Shah can avail the deduction limit of ?30,000 for paying the interest on the top-up loan, only if he is occupying the property himself. If he chooses to renovate or repair any other property that is rented or idle, he can claim deductions without any limit. Any interest paid over the limit of ?200,000 in a particular financial year can be carried forward for a period of 8 years.

Things to remember about top up home loan

Now that we know about the home loan top up tax benefit , let's take a look at some important points to remember about it.

• In case you choose to use the funds from your top-up loan to fund an education loan, you cannot claim tax deduction on the interest paid since your education loan allows you to avail this benefit under Section 80E.
• A top-up home loan is a better option as compared to other loans because it can be availed at much lower interest rates with flexible loan tenures, which is simply added to the existing home loan. Remember that lenders typically provide home loans lasting for 20 years or more.
• The tax benefits provided under a home loan and top-up home loan are also not provided on any other types of loans. That said, you must evaluate your other available loan options before you settle for any specific loan.
• The option for top-up loans is also provided only to those borrowers who have adhered to the lender's requirement of paying the minimum number of home loan instalments as defined by the lender.