[ecis2016.org] Here is everything you need to know about construction loans in India
Among the various products that banks offer, to cater to the varying needs of property buyers and owners, are construction loans. Even though there might be some similarities between a construction loan and a home loan, the two should not be confused to be the same, considering they are inherently different financial products.
You are reading: All about home construction loans
What is a construction loan?
A construction loan is money that you borrow to build a residential property on a piece of land or plot. It is different from a plot loan in the sense that a construction loan facilitates the constitution of a building and not the purchase of the plot. It is also different from a home loan, which is borrowed to purchase an apartment or a flat. Even if the property you have invested in is an under-construction one, the home buyers take a home loan and not a construction loan from the bank; it is your builder who must have taken a construction loan to build the project.
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Key features of construction loan
A key feature of construction loans is that they are not disbursed in one go, like home loans or plot loans. The bank disburses the construction in tranches, depending upon the progress of work.
A construction loan only covers the structural makeup of the property building. This means, your loan will not cover the cost involved in improving the interiors of the property.
Borrowers must also bear in mind that banks typically fund a certain percentage of the construction cost as construction loan. Private lender Axis bank, for example, offers 80% of the estimated construction amount as the loan.
Documents needed for construction loan
Depending on the bank from which you are taking the loan, you may have to submit certain documents. Even though this is not an exhaustive list, the borrower has to submit some or all of these documents, along with the loan application, to get a construction loan:
- Age proof
- Income proof
- PAN card details
- Address proof
- Property / land-related documents
- Estimated construction cost quotation.
Best construction loan products
All leading banks in India provide construction loans at attractive interest rates. India’s largest lender SBI, for example, offers construction loans through its SBI Realty product. This product allows the borrower to build the unit within five years from the date the loan has been sanctioned. The maximum amount of loan that can be offered to a customer can range up to Rs 15 crores, with a comfortable repayment tenure of 10 years.
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Home construction loan interest rate and processing fee
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Mentioned below are the current rates of interest on construction loan products of leading banks:
|Bank||Interest rate per annum||Processing fees|
|HDFC||6.90%-7.55%||0.50% of the loan amount + tax|
|SBI||7.70%-7.90%||0.4% of the loan amount + tax|
|ICICI Bank||7.20%-8.20%||0.50% of the loan amount + tax|
|Punjab National Bank||7.50%-8.80%||0.30% of the loan amount + tax|
|Axis Bank||8.55% onwards||1% of the loan amount + tax|
|Canara Bank||6.95% onwards||0.50% of the loan amount + tax|
|Bank of India||6.55% onwards||0.25% of the loan amount + tax|
Note: Data as on December 20, 2020.
Construction loan tax benefits
Just like home loans, borrowers can avail of tax deductions on payment of interest and principal on the construction loan, under Section 80C and Section 24. However, even if the loan is taken to build your first home, you will not be able to claim benefits under Section 80EE and Section 80EEA, as these apply only in case of ‘acquisition of a residential property’. This means that you cannot claim deduction if you have bought a plot and plan to build your first home on it with the help of housing finance.
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How to apply for construction loans?
Borrowers can visit a branch or apply for the loan online, through the official portal of the bank concerned.
Are home loans different from construction loans?
Home loans are offered for the purchase of a property while construction loans are offered to build a property on a piece of land.
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How is a plot loan different from a construction loan?
A plot loan is used for buying a piece of land which can be developed later for residential purposes. A construction loan on the other hand is offered to build a property on a piece of land.
Can I get tax benefits on plot loans?
Plot loans do not have tax benefits like home loans.
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