If you want to buy a house, you can either go for an under construction or ready to move property. Both have their merits and demerits. Many people prefer to buy an under construction property simply because they are much cheaper as compared to a ready to move-in property and have much easier payment plans. Moreover, you can easily fund your purchase of under construction property with a home loan. Buying an under-construction property or constructing your own house has different tax implications than buying a ready to move in property. In this article, we will tell you all about under construction properties and show you how to avail income tax rebate on home loan for under construction property.
What is an Under Construction Property?
An Under Construction property is simply a property which is in construction stage and has not yet received completion certificate from the municipal authority. You can either construct a house on your own plot or you can invest in a property being constructed by a builder. Both are called under construction properties.
Once, the construction is completed as per the approved layout plan, the local municipal authority hands over the completion certificate. After ensuring that the property complies with building codes and has all necessary facilities of electricity, water, sewage disposal etc., occupancy certificate is given. Once, completion certificate and occupancy certificate are received, the property is called as ready to move in property.
Home Loan Process for Under Construction Property
If you are purchasing an under-construction property, make sure that banks have approved the project. This will ensure two things – (1) You can make sure that the builder has all necessary approvals for the project, (2) Home loan approval process can be hassle free if you apply through the bank that has already approved the project.
Once, your home loan is approved, the bank will disburse the loan amount in installments linked to construction stages. In case of self-constructed house, you can go for a composite loan which would include the cost of plot and construction cost. In any case, the bank will not disburse any amount until you pay your entire down payment amount.
For, repayment of home loan for an under construction property, banks can offer you two options – (1) either you can start paying EMI on the entire loan from the date of first disbursement, or (2) you can opt for pre-EMI option in which you will be paying only the interest on the disbursed amount till the entire loan amount is disbursed or maximum period of construction (as written in loan agreement) is reached, whichever is earlier.
Income Tax Rebate on Home Loan for Under Construction Property
- Income Tax provisions allow deductions on principal and interest repayment of home loan. Under section 80C of IT Act, you can claim deductions of upto Rs. 1.5 lakhs for principal repayment along with other eligible investments like EPF, PPF, Insurance Premiums, ULIP, NSC etc. But the catch here is that you can claim deduction on principal repayment from the financial year in which you receive possession of your property.
- No rebate is allowed on principal repayment during construction. So, you may choose the pre-EMI option during construction stage in which you have to pay only interest portion during construction.
- All tax benefits claimed for principal repayment will be reversed if the property is sold within 5 years of completion of property.
- Under section 24, you can claim income tax rebate on interest repayment from the financial year in which the property is completed and you received possession. In case, the property is self-occupied, you can claim deduction on interest repayment upto Rs. 2 lakhs per year. However, if the construction is not completed within 3 years, this limit goes down to Rs. 30,000.
- If you own more than one residential property, you will have to treat one property as self-occupied and rest of the properties will be treated as let out. For more details on tax provisions for second home, read Tax Benefit on Second Home Loan.
- You can also claim deduction on accumulated Interest paid During Construction (IDC) in five equal installments along with regular interest for the financial year. This means that you can claim 20% IDC every year over five years from the year of completion of property.
- Tax deduction claimed on interest payment will not be reversed if you sell the property within 5 years of completion.
Suppose you took a home loan of Rs. 40 lakh in June 2013 at 11% interest p.a. for 20 years to buy an under construction property, which was completed in May 2015. Since, you received possession in FY 2015-16, you can claim Interest During Construction (IDC) upto 31 March 2015 i.e. for 22 months. Say, you had opted for pre-EMI option, the total interest paid by you during 22 months was Rs. 5 lakhs while you did not repay principal amount during construction.
Now, you can claim deduction on IDC of Rs. 5 lakh over and above the yearly interest paid, in five equal installments of Rs. 1 lakh (Rs. 5 lakh/ 5) each, starting from the financial year 2015-16 (AY 2016-17).
Hope you can now maximize your income tax benefit on home loan for under construction property. While filing your income tax return, make sure to mention the pre-construction interest deduction in the relevant box and the interest paid for the year in another.
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