Buying a home which is under construction is not a new concept. People prefer to buy an under construction home over a ready-to-move house for getting many benefits. An under construction property is always less costly than a fully constructed house. Just like taking a home loan for a fully constructed home, a home loan can be taken for a property which is not fully constructed. The interest rates on both the loans are same and both can claim tax benefits.
A house loan taken for an under construction property can claim for tax benefits but only after receiving the Occupancy Certificate from the builder or after the Possession. The time frame of a home loan under construction is divided into two parts. The time period when the loan has been taken to the time before starting of the construction of the home is known as "pre-construction period". Until construction is complete or acquisition is made, the period is called as “Prior Period”. The interest which is being paid in these both periods is called PPI (Prior period Interest)
Let's say a home loan is taken in the year of FY 2014-15 and the possession is taken in the FY 2016-17, so the tax deduction can be claimed from the financial year 2016-17. A tax benefit can be claimed on principal repayment as well as payment of interest on home loans. A home loan can be tax-efficient with a proper understanding of three major sections of the Income-Tax Act that cover tax gains under house property. These three sections are 80C, 80 EE and 24B.
Section 80C
Under income tax act 80c, a home loan borrower can take the advantage of tax rebate on the principal repayment up to INR 1,50,000 every financial year. Even tax deduction can be applied under this section for payment of stamp duty charges. But as mentioned earlier, the deduction can be applied after completion of the construction.
Section 24B
Under section 24B, a tax deduction can be applied for payment of interest up to INR 2,000,000 on the home loan in every financial year. The maximum benefit for a self-occupied property is up to 2 Lakhs, whereas if the property is rented out and the owner is residing in another rented house then there is no highest limit of how much of the interest paid can be claimed for the tax deduction. But the rent which the owner is gaining will be a taxable income.
Section 80 EE
This is a tax benefit which can be availed only by the first time home buyers. This section provides an additional deduction of INR 50,000 over section 80C and section 80EE. This is a newly launched facility and is applicable for those who have taken a home loan between April 1, 2016, and March 31, 2017. The property value must not be more than 50 Lakhs and the loan amount should not cross more than 35 Lakhs. This benefit can be enjoyed until the end of the tenure.
Checklist
Here is the checklist which one should keep in mind while applying for a tax benefit
Cannot claim tax benefit if the house is sold within 5 years
If the house is sold within 5 years of occupancy then the tax deduction will be reversed and will be considered as income which will come under applicable tax payment. The deductions which a borrower enjoyed on principal payment will be lumped together and will be counted in income.
The construction must be completed within 5 years
This is the risk factor associated with the tax deduction in a home loan under construction. A tax deduction of 2 Lakhs cannot be applied if the construction is not completed within 5 years from the day of loan sanctioning. The claim of Rs. 2 Lakhs goes down to Rs. 30,000 in case construction of the house is not completed within a period of five years from the end of the year in which such loan was taken.
Should be claimed in five installments
One cannot apply for a tax deduction until the completion of the construction. Once the construction is completed, one is allowed to claim the accumulated interest paid. The tax rebate should be applied in five equal installments along with the regular interest of that particular financial year. However if the loan sanctioning and the occupancy happens in the same financial year then one can apply for a tax deduction by the end of that particular financial year.
Repayment of the loan in prior period cannot claim a tax deduction
If a borrower repays the loan before the construction is completed then he/she is not allowed to get the tax benefit. A repayment done in prior period is beyond the tax deduction regime.
The tax deduction is one of the prominent benefits of home loan. A home aspirant can apply for a home loan for an under construction property which will comparatively less than a ready-to-move home. But there are risk factors too which one should not overlook. One has to start paying EMI soon after the sanctioning of the loan. So paying EMI and house rent at the same time will bring much financial pressure.
Moreover, being late in delivering homes can bring more financial hiccups to any borrower. If the possession is delayed one may not avail the full tax deduction which a great loss for any borrower. But if the borrower concerned then he can definitely reap a decent benefit by purchasing a home under construction. Being informed of new rules and regulations of Government is sure to save maximum in tax payment.