Loan Against Property Tax Benefits for SMEs – Explained
TL;DR: A loan against property (LAP) offers SMEs tax benefits on interest payments, either as a business expense deduction or under Section 24(b) of the Income Tax Act. The applicable benefit depends on how the loan proceeds are used and which tax regime the borrower has opted for. Consulting a CA before filing is strongly recommended.
A loan against property (LAP) is one of the most underutilised tax planning tools for Indian SME owners. Many borrowers take a LAP for business expansion, working capital, or equipment purchase, then leave significant tax deductions unclaimed at filing time. This article explains every applicable income tax benefit for SME borrowers using a LAP, how the old and new tax regimes affect your claim, and what a CA needs to calculate your actual deduction.
What Is a Loan Against Property Tax Benefit?
The primary tax benefit of a loan against property is the deduction on interest paid. For SME borrowers using LAP proceeds for business purposes, the interest paid is a deductible business expense under the Income Tax Act. For individuals using LAP on residential property for personal purposes, Section 24(b) governs the deduction. The applicable benefit depends on loan purpose and the borrower’s tax regime.
This distinction matters enormously for SME owners. Most LAP borrowers are individual proprietors or partners who use the same property, their house or commercial premises, to raise business finance. The nature of the deduction changes based on how funds are deployed, not just on the type of property pledged.
According to SIDBI’s MSME Pulse Report, term loans secured against property account for a significant share of formal credit to small enterprises. Yet tax optimisation on LAP interest remains poorly understood among MSME borrowers. Oxyzo, an RBI-registered NBFC and part of the OfBusiness Group, offers LAP products to eligible SME borrowers with transparent indicative interest rates, enabling borrowers to plan tax deductions with accuracy.
Learn more about: What is NBFC?
Understanding the applicable deduction before signing the loan agreement is the smarter sequence. It affects which tax regime to opt for, how to structure loan documentation, and what records your CA will need.
How Does the Tax Benefit on Loan Against Property Work for SMEs?
For SMEs, the LAP interest deduction works as a business expense, not a personal tax relief. When LAP proceeds are used for business purposes, the interest paid is deducted from business income before computing taxable profit. This deduction is available regardless of whether the borrower has opted for the old or new tax regime.
This is the most important distinction for SME borrowers to understand upfront.
The Income Tax Act treats interest on borrowed capital used for business differently from interest on loans used for personal consumption. Section 36(1)(iii) of the Income Tax Act allows a deduction for interest on capital borrowed for business or profession. If a manufacturer mortgages their factory premises to raise ₹80 lakh for a new production line, the annual interest paid on that LAP, say ₹9–10 lakh at an indicative rate, is deductible as a business expense. This reduces taxable business income directly.
A garment exporter in Tirupur who raises ₹1 crore LAP against commercial property to fund pre-shipment working capital can claim the entire annual interest payment as a business deduction. At an indicative interest rate of 11% p.a., the annual interest component works out to approximately ₹11 lakh, a deduction that materially reduces taxable profit. All figures are indicative; actual deductible amounts depend on the loan structure, disbursement date, and tax year.
What Is the Tax Benefit Under Section 24(b) for LAP Borrowers?
Section 24(b) of the Income Tax Act allows a deduction on home loan interest for residential property. For LAP on self-occupied residential property used for personal purposes, not business, the interest deduction limit under Section 24(b) is ₹2 lakh per annum in the old tax regime. This deduction is not available under the new tax regime for self-occupied property.
This section applies specifically when:
- The property mortgaged is a residential property
- The LAP proceeds are used for personal purposes (home renovation, education, medical expenses)
- The borrower has opted for the old tax regime
For SME owners using LAP for business, Section 24(b) does not apply. Section 36(1)(iii), business interest deduction, applies instead. Conflating the two is a common filing error.
The ₹2 lakh limit under Section 24(b) applies per financial year. If LAP interest for a personal-use loan exceeds ₹2 lakh annually, the excess is not deductible under Section 24(b). However, set-off against other income heads (within the ₹2 lakh cap) is permitted in the old regime.
For let-out or deemed let-out residential property, the deduction on interest is without an upper limit in the old tax regime, though set-off of losses against other income is capped at ₹2 lakh. This is a nuanced position; your CA should model the exact impact based on rental income and total income structure.
LAP Tax Benefits: Old Tax Regime vs New Tax Regime
The tax regime choice directly determines which LAP deductions are available to SME borrowers. Business use LAP deductions are available in both regimes. Personal use LAP deductions under Section 24(b) are only available in the old regime. Here is a clear comparison:
| Scenario | Old Tax Regime | New Tax Regime |
|---|---|---|
| LAP used for business Sec 36(1)(iii) |
Full interest deductible as business expense | Full interest deductible as business expense |
| LAP on self-occupied residential property, personal use Sec 24(b) |
Up to ₹2 lakh p.a. deductible | Not available |
| LAP on let-out residential property, personal use | Full interest deductible; loss set-off capped at ₹2 lakh | Not available |
| Principal repayment on LAP Sec 80C |
Not deductible; LAP is not treated as a home loan | Not applicable |
| Processing fee on LAP, business use | Deductible as business expense | Deductible as business expense |
Key point: Section 80C deduction on principal repayment does not apply to a loan against property. Section 80C applies to home loans under the National Housing Bank definition. A LAP is a mortgage-backed business/personal loan, not a home loan. This is a common misconception among SME borrowers.
Home loan tax benefit under Section 80C (up to ₹1.5 lakh on principal repayment) is available only for loans taken to purchase or construct a residential property. LAP does not qualify.
What Is the Home Loan Interest Deduction in the New Tax Regime?
In the new tax regime, the home loan interest deduction under Section 24(b) for self-occupied residential property is not available. SME borrowers who switch to the new regime lose personal-use LAP interest deductions but retain full business-use LAP deductions under Section 36(1)(iii).
This matters practically for SME promoters who are individual taxpayers.
A promoter who has a home loan and a business LAP on separate properties must assess both positions before choosing a tax regime. Under the old regime, the home loan benefit in new tax regime comparison often tips in favour of the old regime for high-income borrowers with significant property-linked loans.
The new tax regime does not allow deductions under Section 24(b), Section 80C, or Section 80D (health insurance). It offers lower slab rates in exchange for the removal of most deductions. For SME owners with large LAP interest bills on personal-use property, the old regime frequently delivers a lower net tax liability.
A CA should calculate this comparison for every financial year before regime selection. The regime choice is now available annually for individual taxpayers (Budget 2025 confirmed this flexibility for those not opting for presumptive taxation). All tax positions described are subject to applicable law and individual income circumstances. Oxyzo recommends consulting a qualified tax professional before making regime decisions.
How to Calculate Your LAP Tax Benefit?
To calculate the income tax benefit on your LAP, follow these four steps. A home loan tax benefit calculator or LAP interest calculator gives an indicative figure, but your CA should validate against actual loan statements.
Step 1 — Identify loan purpose
Determine what percentage of LAP proceeds was used for business vs personal purposes. Mixed-use LAP may require apportionment of the interest deduction.
Step 2 — Extract annual interest paid
Obtain the annual loan statement from your lender. The statement shows principal repaid and interest paid in each financial year. Only interest is deductible — not the principal repayment on a LAP.
Step 3 — Apply the correct section
- Business use proceeds → Section 36(1)(iii) deduction against business income
- Personal use proceeds, old regime → Section 24(b), up to ₹2 lakh cap for self-occupied property
Step 4 — Model old regime vs new regime
Calculate gross taxable income under both regimes. Add back the LAP interest deduction under the old regime. Compare net tax liability in both scenarios. Choose the regime that minimises your tax outgo.
Illustrative example (indicative only):
An SME proprietor with ₹50 lakh LAP at 11% p.a. pays approximately ₹5.5 lakh in annual interest. If proceeds are used entirely for business, the full ₹5.5 lakh is deductible against business income. At a 30% tax bracket, this generates an indicative tax saving of approximately ₹1.65 lakh. Actual figures depend on the borrower’s total income, regime, and filing position. Consult a CA for personalised computation.
How Oxyzo’s Loan Against Property Works for SME Borrowers?
Oxyzo offers loan against property products to eligible SME borrowers through a digital-first process. Key features and parameters are listed below. All figures are indicative and subject to Oxyzo’s credit assessment at the time of application.
| Parameter | Detail |
|---|---|
| Eligible borrowers | Manufacturing, trading, and services SMEs with Udyam registration |
| Property types accepted | Residential, commercial, and industrial property, subject to valuation |
| Loan amount | Subject to property valuation and borrower credit profile |
| Indicative interest rate | Subject to credit profile, tenure, and loan amount at the time of sanction |
| Loan tenure | Subject to credit assessment and borrower eligibility |
| Disbursement | Fast-track disbursement for eligible applicants |
| Documentation | Digital submission supported |
| Collateral | Property mortgaged as primary security; hypothecation of business assets where applicable |
Oxyzo is an RBI-registered NBFC. All lending decisions are subject to Oxyzo’s credit assessment and internal policies at the time of application.
Process for SME borrowers:
Mentioned here is the complete process for SME borrowers, following which one can prepare for the same:
- Submit online application with property details and loan requirement
- Upload KYC, business financials, property documents, and title deed
- Oxyzo initiates property valuation through an approved valuer
- Credit team assesses repayment capacity and business profile
- Sanction letter issued with indicative rate, tenure, and EMI schedule
- Fast-track disbursement for eligible applicants post documentation clearance
Conclusion
A loan against property delivers real, claimable tax benefits for SME borrowers, but only when the right deduction section is applied to the right loan purpose. Business-use LAP interest is deductible regardless of tax regime. Personal-use LAP interest deduction depends on the old regime and Section 24(b) limits. No LAP qualifies for Section 80C. Oxyzo, an RBI-registered NBFC, offers LAP products to eligible SME borrowers with transparent indicative terms. Speak to an Oxyzo advisor to understand your LAP options, and consult a CA to maximise your applicable tax benefit.
Loan Against Property Tax Benefits FAQs
Q: Is the interest on a loan against property tax deductible?
A: Yes, in two ways. For SME borrowers using LAP for business purposes, the interest is deductible as a business expense under Section 36(1)(iii) of the Income Tax Act. For personal-use LAP on residential property, Section 24(b) allows a deduction of up to ₹2 lakh p.a. in the old tax regime. Consult a CA for your specific position.
Q: Can I claim Section 80C deduction on my LAP principal repayment?
A: No. Section 80C deduction on principal repayment applies only to home loans taken to purchase or construct a residential property. A loan against property does not qualify for Section 80C. This is a common misconception, confirm with your CA before filing.
Q: Is the LAP interest deduction available in the new tax regime?
A: For business use, yes, the full interest is deductible as a business expense under Section 36(1)(iii) regardless of regime. For personal use on self-occupied property, the Section 24(b) deduction is not available in the new tax regime.
Q: What documents do I need to claim the LAP interest deduction?
A: You need the annual loan statement from your lender (showing principal and interest breakup), the loan sanction letter, property mortgage documents, and proof of how loan proceeds were used. Your CA will need these at filing time.
Q: Can a partnership firm or Pvt Ltd company claim LAP interest as a deduction?
A: Yes. For business entities, interest on borrowed capital used for business is deductible under Section 36(1)(iii). The deduction is available to proprietorships, partnerships, LLPs, and private limited companies, provided loan proceeds are used for business purposes.