Tax benefits of loan against property serve as a major financial advantage for entrepreneurs in Kolkata looking to lower their net borrowing costs. A Loan Against Property (LAP) is a secured credit facility where you pledge your residential or commercial real estate as collateral. While it provides large-scale funding at lower rates than personal loans, the ability to claim tax deductions makes it an even more efficient tool for business growth in 2026.
In the current financial year, the Income Tax Act provides specific provisions that allow business owners to treat the interest paid on these loans as an allowable expenditure. Whether you are running a wholesale firm in Burrabazar or an IT startup in Salt Lake Sector V, understanding how to correctly account for these payments can significantly reduce your tax liability. This guide details the legal sections and documentation required to maximize your savings.
Understanding Section 37(1) for Business Deductions
The most relevant provision for Kolkata business owners seeking tax benefits of loan against property is Section 37(1). This is a general provision for any business expenditure that is not of a capital or personal nature. If you utilize the loan funds purely for business operations, the interest you pay becomes a deductible expense from your business income.
According to data from Investopedia, a deduction reduces the amount of income that is subject to tax. In India, there is no upper limit on the interest amount you can claim as a business expense under Section 37(1), provided you can prove that the funds were used for “working capital,” inventory purchase, or day-to-day operations. This is a massive benefit for large units in the Howrah industrial belt needing substantial liquidity.
Interest Deduction for Working Capital and Expansion
For many traders and manufacturers, the primary use of a secured business loan in Kolkata is to manage cash flow. When you use the funds from a LAP to pay suppliers or purchase raw materials, the interest is treated as a revenue expenditure. This means it is subtracted from your gross business revenue, leading to a lower taxable profit.
Furthermore, the “raising expenses” associated with the loan, such as processing fees and documentation charges, are also deductible under the same section. In 2026, banks often charge 0.5% to 1% as a fee. For an MSME loan of ₹1 Crore, this fee of ₹1 Lakh can be shown as a business expense in the year it is paid, providing immediate tax relief.
Tax Benefits Under Section 24(b) for Property Use
If you use the funds from a LAP for property-related purposes rather than general business needs, the tax benefits of loan against property fall under Section 24(b). This applies when the borrowed amount is used for the “purchase, construction, or repair” of a residential property.
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Self-Occupied Property: You can claim a deduction of up to ₹2 Lakhs per annum on the interest paid.
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Let-out Property: The entire interest amount is deductible against the rental income. However, any loss under the head “Income from House Property” can only be set off against other income up to a limit of ₹2 Lakhs per year.
For a business owner in New Town or Ballygunge using a LAP to renovate their office-cum-residence, this section provides a structured way to lower the tax burden. It is important to obtain an interest certificate from your lender at the end of the financial year to support this claim.
Why Principal Repayment Offers No Tax Benefit
A common point of confusion among borrowers is whether they can claim the principal repayment of a LAP under Section 80C. Unlike a standard home loan, where the principal is deductible up to ₹1.5 Lakhs, a Loan Against Property does not qualify for Section 80C benefits. This is a critical distinction that Kolkata business owners must keep in mind during tax planning.
The tax benefits of loan against property are strictly confined to the interest component and the initial fees. According to the official Income Tax Department guidelines, the repayment of the borrowed capital is considered a “capital repayment” and does not reduce your taxable income. This makes it even more important to negotiate for the lowest LAP interest rates to maximize the utility of the interest deduction.
![Kolkata business owner reviewing tax documents and loan statements on a laptop screen] Alt text: tax benefits of loan against property
Compliance and Documentation Checklist for 2026
To successfully claim these benefits, you must maintain a clear bank trail. The Income Tax Department in 2026 is highly focused on “End-Use Verification.” If the loan funds are mixed with personal savings, the deduction may be rejected during a tax audit.
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Loan Sanction Letter: This document must clearly state the purpose of the loan.
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Bank Statements: A clear trail showing the loan amount moving from the bank to business vendors or suppliers.
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Interest Certificate: A yearly statement from your bank or NBFC showing the total interest paid.
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Invoices: Keep all business invoices paid using the loan amount as proof of expenditure.
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Audited Books: Ensure your Chartered Accountant records the loan interest under the “Financial Costs” head in your Profit & Loss statement.
For those operating in North 24 Parganas or South 24 Parganas, maintaining these records is vital, especially if you are seeking a GST loan alongside your property-backed facility.
When Can You NOT Claim Tax Benefits?
It is equally important to know when the tax benefits of loan against property are not available. If the funds are used for “personal consumption,” the interest is not tax-deductible.
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Personal Travel: Funding a family vacation.
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Weddings: Paying for ceremony expenses in Ballygunge or Salt Lake.
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Medical Bills: Using the money for personal health emergencies.
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Education: Funding a child’s higher education abroad.
While these are legitimate uses of a mortgage loan, they do not qualify for deductions under Section 37(1) or Section 24(b). If you are a doctor using a loan for doctors for your clinic, the interest is deductible; if used for a personal car, it is not.
Pro Tip: In the 2026 market, users trust Video. Watch this 60-second “Short” or “Reel” explaining the “Wholly and Exclusively” rule for business interest deductions. This simple tip can help you stay compliant and avoid tax notices.
Impact of GST on Loan Against Property Fees
In 2026, GST at 18% is applicable on the processing fees and other service charges of a LAP. While the GST paid on these fees is a cost, it can often be claimed as an “Input Tax Credit” (ITC) if your business is GST-registered. This effectively makes the loan raising expenses even cheaper for Kolkata-based wholesalers and manufacturers.
Always ensure your lender has your correct GSTIN in their records before the loan is disbursed. This ensures that the GST invoice is reflected in your GSTR-2B, allowing for a smooth ITC claim. This is a vital part of tax planning for MSMEs in the industrial belts of Howrah.
Frequently Asked Questions (FAQs)
Is interest on a loan against property tax deductible for businesses?
Yes, under Section 37(1) of the Income Tax Act, the interest paid on a LAP is a tax-deductible business expense if the funds are used wholly and exclusively for business purposes like working capital or expansion.
Can I claim Section 80C benefits for my mortgage loan?
No, the principal repayment of a Loan Against Property does not qualify for Section 80C deductions. This benefit is reserved only for home loans used to purchase or construct a residential house.
Is there a limit on the interest deduction for business use?
There is no fixed upper limit for interest deduction under Section 37(1). As long as the expenditure is genuine and incurred for the business, you can claim the entire interest amount paid during the financial year.
Can salaried individuals get tax benefits on LAP?
Salaried individuals can only get tax benefits of loan against property under Section 24(b) if they use the funds to buy, build, or repair a residential house property. If used for other purposes, no deduction is allowed.
What documents are required to prove business use?
You need a loan sanction letter, bank statements showing the fund trail, interest certificates from the lender, and invoices or purchase orders from your business vendors.
Does a top-up loan also have tax benefits?
Yes, a top-up loan on an existing LAP can also qualify for tax benefits, provided the end-use falls under the eligible categories of business expenditure or residential property construction/repair.
Final Summary for Kolkata Entrepreneurs
Strategically utilizing the tax benefits of loan against property can transform a standard debt into a powerful growth engine. By ensuring that your loan funds are tracked and properly recorded, you can significantly lower your effective interest rate through tax savings. Whether you are expanding a factory in Sodepur or managing a retail chain in Burrabazar, a well-documented LAP is your best partner in financial efficiency.
Ensure your property mutation is current and consult with a qualified tax advisor to ensure your ITR reflects these deductions correctly. For more information on business credit, browse our sitemap or check our latest financial insights.
Want to know how much you can save on taxes with a LAP? Our experts can help you structure your loan application to maximize your financial benefits. Contact us today for a free consultation.
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