Plot Loan vs Home Loan in Bangalore: Loan Share, Tenure and Tax
A loan for a residential plot and a loan for a flat or house are separate products with different terms. The plot loan covers a smaller share of the price, runs for fewer years and brings no tax deduction while the land is vacant. This guide compares the two for a buyer in Bangalore, including the special case of a site won at a BDA e-auction.
What Each Loan Pays For
A home loan funds a home that exists or is being built: a ready flat, an under-construction flat, or a house on land the borrower owns. The lender's security is a dwelling with a clear market value. That is why home loans carry the longest tenures and the lowest rates a lender offers.
A plot loan funds the land alone. Vacant land is harder to value and slower to sell, and it earns nothing until a house is built. Lenders respond with tighter terms on three points: the share of the price they fund, the tenure and the rate. A third product, the composite loan, funds the plot and the construction together and is treated as a home loan with a deadline to build.
The Two Loans Side by Side
The table shows how the terms usually differ. Each lender sets its own figures, so the sanction letter is the final word.
| Point | Plot loan | Home loan |
|---|---|---|
| Purpose | Purchase of a residential plot | Purchase or construction of a home |
| Share of the price funded | Commonly 70% to 80% of the plot value | 75% to 90%, by loan size |
| Tenure | Often 10 to 15 years | Up to 30 years |
| Interest rate | Often a little higher | Lowest rate the lender offers |
| Condition to build | Set by many lenders, with a deadline | Does not arise |
| Tax deduction | Begins only after a house is completed | Available from the year of possession, old regime |
Down Payment: The Share the Lender Funds
For home loans, the Reserve Bank of India caps the loan as a share of the property value. The cap is 90% for a loan up to Rs. 30 Lakhs, 80% for a loan above Rs. 30 Lakhs and up to Rs. 75 Lakhs, and 75% above Rs. 75 Lakhs. Lenders work within these caps and often lend close to them on a good file.
On plots, lenders stay lower by their own policy, and funding of 70% to 80% of the plot value is common. The value used is the lower of the sale price and the lender's own valuation. Stamp duty and the registration fee are outside the loan in both cases, so they add to the cash a buyer brings.
Tenure and the EMI
A shorter tenure raises the EMI for the same loan amount. The illustration below uses 8.5% a year for both loans so that only the loan share and the tenure differ. Actual plot loan rates are often higher than this.
| Item | Plot of Rs. 60 Lakhs | Flat of Rs. 60 Lakhs |
|---|---|---|
| Loan share | 70% | 80% |
| Loan amount | Rs. 42 Lakhs | Rs. 48 Lakhs |
| Down payment | Rs. 18 Lakhs | Rs. 12 Lakhs |
| Tenure | 15 years | 20 years |
| EMI | About Rs. 41,359 | About Rs. 41,656 |
The plot buyer brings Rs. 6 Lakhs more at the start and still pays almost the same EMI on a smaller loan. Both buyers also pay stamp duty of 5.6% with cess and surcharge and a 2% registration fee in Karnataka. On Rs. 60 Lakhs that is Rs. 3.36 Lakhs of duty and Rs. 1.2 Lakhs of fee. The EMI calculator gives the figures for other prices.
The Condition to Build
Many lenders give a plot loan on the understanding that a house will follow. The sanction letter then names a period within which construction must start or finish. The period is commonly two to five years and differs from one lender to another.
A borrower who misses the date may face a higher interest rate from that point, since the loan is then treated as a loan on land. Some lenders ask for proof of construction, such as the sanctioned building plan, at set intervals. A buyer who plans to hold the land for many years should ask for this clause before applying and choose a lender whose terms match the plan.
Tax Treatment
Income tax deductions on a housing loan belong to a house. Interest on a loan for vacant land earns no deduction, and neither does the principal repaid. The position changes once a house is built on the plot with the same loan or a further loan.
From the year the house is completed, interest is deductible up to Rs. 2 Lakhs a year where the owner lives in it. Interest paid in the earlier years is claimed in five equal yearly parts within that limit. These deductions exist only in the old tax regime. The new regime, which is the default, gives none for a self-occupied house.
Which Plots a Lender Will Fund
A plot loan is given only on land that is legally ready for a house. Lenders in Bangalore usually look for the following:
- Residential land use, with a conversion order where the layout was formed on agricultural land
- A layout approved by the planning authority for the area, such as the BDA or the BMRDA
- Clear title, with the chain of deeds and an encumbrance certificate
- A khata in the seller's name and property tax paid up to date
- Plot number and dimensions that match the approved layout plan
Agricultural land, revenue sites and plots in unapproved layouts fall outside plot loans. A B-khata site is also hard to fund. Approved layouts in the growth corridors, for example plots for sale in Devanahalli, are the kind of land that banks accept.
Financing a Site Won at a BDA E-Auction
The Bangalore Development Authority sells sites in its layouts through e-auctions. Banks lend on BDA sites readily, since the title comes from the authority itself. The difficulty is time.
The auction notification fixes the payment dates. In recent auctions, the winning bidder has had to pay 25% of the bid within 72 hours and the balance within 45 days of the allotment letter. A bidder who misses a date loses the earnest money deposit. The current notification should be read for the exact terms before bidding.
A loan cannot be arranged from scratch inside these dates. The steps below keep a bidder within them:
- Get an in-principle sanction for a plot loan before the auction, and note the amount
- Keep the first 25% and the buyer's own share ready in the bank account
- Ask the lender whether it releases money on the allotment letter, since the sale deed follows full payment
- Bid only up to a price at which the loan share and the cash in hand add up to the full amount
- Hand the allotment letter to the lender on the day it is issued
Choosing Between the Loans
The choice follows the plan for the land. A buyer who will hold the plot and build much later takes a plot loan and accepts the larger down payment and the shorter tenure. A buyer who is ready to build within two or three years is better served by a composite loan, which brings home loan terms and the tax deductions after completion.
A buyer who simply needs a place to live will find a home loan on a flat or house the cheapest borrowing of the three. Whatever the route, the lender's letter should state the loan share, the tenure, the rate and any deadline to build. These four terms decide the real cost of buying land on credit.
