What are plot loans?

[ecis2016.org] Everything you need to know about plot loans in India

Those planning to purchase a plot in India for the purpose of building a house, have easy financial access, since almost all leading Indian banks offer plot loans, also known as land loans. In this article, we elaborate the various aspects of plot loans/ land loans.

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Plot loans: Definition and purpose

Any loan that a buyer seeks from a lender, to buy a piece of land anywhere in India, would qualify as a plot loan. Financial institutions in India offer financial assistance to buyers to purchase land parcels and plots on which they intend to build a residential unit. Note here that plot loans are offered to the buyer for this specific purpose. In case the borrower plans to build a commercial unit or use the land for agricultural purposes, he would not be able to apply for land loans or plot loans offered by banks. So, it is important to understand the difference between home loans and plot loans.

Difference between plot loan and home loan

You apply for a home loan to buy an already built home or to construct a house on a piece of land. On the other hand, a land loan/ plot loan is acquired to buy a piece of land or plot. These two products have various other dissimilarities that are discussed in the following article: Difference between home loan and land loan

Types of plot loans

Land loans are of two varieties: loans to buy a residential plot and loans to buy a plot and construct a home. Most banks in India offer loans to borrowers of the second category, because of the risks involved in plain vanilla plot loans.

A bank will be more forthcoming if the land loan is being taken to acquire plots being sold by development bodies like the Delhi Development Authority (DDA), the City and Industrial Development Corporation (CIDCO), the Bangalore Development Authority (BDA), etc.

Benefits of plot loans

Apart from the fact that plot loans offer buyers an option to purchase a lucrative piece of land through easy access of finance at attractive lending rates, land loans also enable them to get tax deductions under Section 80C and Section 24 of the Income Tax (IT) Act. Another feature of plot loans in India is that the borrower will not have to pay any pre-payment charges, if they are able to close the loan before the tenure ends.

Eligibility for plot loan

To avail of plot loans, the buyer must be a resident of India, earning his income through a job or by way of self-employment. He should be above 18 years of age while applying for the loan. Lenders like ICICI Bank, however, offer plot loans for applicants aged at least 25 years. While banks have varying norms in this regard, they typically do not offer plot loans to individuals over 65 years.

Documents required for plot loan

With the duly filled application form for the plot loan, the borrower has to submit self-attested copies of various documents that the bank would scan to grant him a plot loan. In addition to identity, age and address proofs, the borrower will have to submit documents pertaining to proof of his income and all land-related papers. While different lenders might ask for different papers, they would expect the buyer to produce all or some of the following documents:

Documents that act as identity, age and address proof:

3 passport-size photographs

Aadhaar card

Passport

Voter ID card

Driving licence

Electricity or water bill

Bank statement /copy of pass book reflecting address

Rent agreement

Sale deed

Documents that act as income proof for salaried borrowers:

PAN card

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Salary slips for the last three months

Form 16 of past two years

Copy of bank statements for the past three months (salary account)

Documents that act as income proof for self-employed borrowers:

PAN card

Certificate of qualification for professionals

Last three years’ income tax returns (self and business) with profit and loss account and balance sheets, duly certified/audited by a chartered accountant

Bank statement for the last 12 months, business and personal

Property documents

Copy of allotment letter / buyer agreement

Title deeds, including the previous chain of the property documents in resale cases

Agreement of sale

Sale deed

Registration and stamp duty receipt

NOC from builder

Development agreement

Note: The above list is indicative and lenders might ask for additional documents at the time of application for plot loan.

How to apply for plot loans?

Borrowers can visit a branch or apply for the plot loan online through the official portal of the bank concerned.

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Maximum amount on plot loans

Lenders typically offer 70%-90% of the purchase value as land or plot loans under their loan to value ratio norms. Thus, the buyer will have to arrange between 10% and 30% of the plot and construction cost from his own funds. Punjab National Bank (PNB), in fact, asks borrowers to arrange only 10% of the purchase cost, including stamp duty and registration charges, on their own, considering they meet certain conditions.

However, lenders have a cap on the highest amount they will be offering as a plot loan, irrespective of the first factor. State Bank of India (SBI), for instance, offers up to Rs 15 crore as land loan through its Realty Home Loan product. ICICI Bank, on the other hand, offers land loans for plots ranging between Rs 8 lakhs and worth up to Rs 3 crores. This means that even if you are able to pay Rs 1.20 crores to purchase a plot worth Rs 4 crores (Rs 1.20 crores is 30% of Rs 4 crores), ICICI Bank won’t entertain your request for a plot loan.

Banks that provide plot loans

All leading Indian banks offer loans for land purchase. Some of the leading banks that offer borrower plot loans at attractive rates include SBI, PNB, HDFC, ICICI Bank, etc. Note that all these banks offer loans to buy a plot and construct a unit on the same. The amount is not meant to simply buy a plot.

Interest rate on plot loans

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Typically, banks charge a higher rate of interest on plot loans when compared to home loans. While housing loans at PNB are currently available at 6.80%, the lender charges a minimum interest of 8.50% on plot loans. However, ICICI Banks charge similar interest on home loans, as well as land loans.

Depending on the loan amount, the borrower’s credit score and nature of his employment, SBI currently charges an interest ranging between 7.70% and 7.90% annually. Home loans at India’s largest lender are available at 6.90% currently.

*As on November 20, 2020

Source: bank websites

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Plot loan processing fees

Just like home loans, banks charge a processing fee as part of the loan disbursal process. While some banks ask for a flat fee that can run up to Rs 10,000, others charge a certain percentage of the loan amount (between 0.5% and 1% of the loan amount) as processing fee for plot loans.

Other charges on plot loans

Apart from the processing fee, the borrower will also have to pay the legal and technical assessment fee to the bank. Banks typically send legal and technical experts to physically visit the plot and examine the documents, in order to ascertain that it is free from any encumbrances, legally and physically.

Also, in case the bank reduces rates in future and you plan to reap the benefit of the lower interest rates, you will be asked to pay a conversion fee for the same.

Plot loans tenure

Different banks have different rules with respect to the loan tenure. While SBI offers plot loans for a maximum period of 10 years, PNB offers plot loans for a maximum tenure of 30 years. Private lender ICICI offers plot loans for a 20-year repayment tenure.

Plot loan EMI payment methods

A borrower has various options to pay his monthly EMIs against a plot loan. These include:

Standing instruction: You can give standing instructions to your bank, through which the EMI will be automatically debited every month at a specific date from your account. You do not necessarily have to have an account with the bank from which you have taken the plot loans for this and can use your regular bank account.

Post-dated cheque: You can also pay your EMI by way of issuing a post-dated cheque, in a timely manner, to the bank. However, this facility is offered only to those borrowers where the ECS facility is not available.

Tax benefits on plot loans

While there are no tax benefits if the loan is availed of to purchase a plot only, tax benefits are available to borrowers if the amount is also being used to construct a house on the same land. In this situation, borrowers will be able to claim tax deductions under Section 80C (principal component payment) and Section 24 (interest component payment) of the IT Act. Under Section 80C, the upper limit on tax deduction is Rs 1.50 lakhs in a year, while it is Rs 2 lakhs in case of Section 24.

Read all about home loan income tax benefits

Plot loans: Key facts

Time limit: As a prerequisite, banks ask the borrower to construct a dwelling unit on the plot within a specific period in order to get the loan. In SBI Realty Home Loan product, for example, the borrower has to build a home within five years of sanction of the plot loan. In ICICI Bank’s plot loans, the construction has to be completed within two years from the date of disbursement of the land loan.

Location limit: Banks typically offer plot loans to buy land in urban and developing areas. Their products do not cover rural areas.

Prepayment charges on fixed rate loans: While banks do not charge any prepayment fee if the plot loan is taken on a floating rate of interest, they will impose a penalty if the loan is taken on a fixed rate. HDFC Bank, for example, imposes a 2% pre-payment penalty on pre-closure of plot loans.

Impact of credit score: Amid rising cases of delinquencies, banks are now assigning much higher importance to credit score of borrowers. While borrowers with the best credit score are offered the lowest rate of interest, borrowers with poor credit score have to pay much higher interest. While a credit score of 700 and above is considered good by financial institutions, a score below this is considered poor.

Legal encumbrances: Unless the property-related documents are free of any legal issues, the bank will not entertain your request for a plot loan.

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