Home loans are offered by bankers to your builder directly when it is taken for under construction projects. The builder will pay interest on this loan amount until he will hand over the house key to you after construction. The customer (ultimate investors to the house) can have the benefit of owning the house and paying EMI for the same only after possession. Banks will release payments for these under construction projects based on the progress of the property. Thus it is relatively safe to invest in this type of projects if you are keen to own a house and not willing to pay EMI and rent on existing house simultaneously. Builder and financier will have an agreement stating when the loan will be disbursed by the bank and at what stages of the project. The agreement can be such that after 25% of the project construction or once 2nd floor construction is complete.

Why Should You Calculate the EMI before Taking a Home Loan

If you are a property investor then there is no doubt that taking home loan on under construction projects is a benefit. These tips will help you to maximize you profit on such investment:

  1. Be Wise to Negotiate a Deal with the Builder:

Though the price quoted by the builder seems to be very reasonable to you, make sure you are negotiating a deal. Most of the builders will quote a price to general public considering the bargain requests that come. At times few thousands or even a lakh can be negotiated with the builder if you try to make good contact. If the house/ apartment offered to you is in 8th or 10th floor, then there is more reason to negotiate with the builder. You will not have much resale value if the property is not easily accessible for future buyers.

  1. Restructure Payment Schedule as per Your Convenience:

While the builder may introduce you to a certain pre-planned payment schedule, there is always room for restricting. Don’t be ready to pay money to the builder until there is actually work seen on the project. As a potential owner of the house, you have every right to contact the bank/ financier and let them know the status of construction. In case if the construction is not as per pre-approved, you can ask bank to stop releasing next installment to the builder until project is completed as per agreement.

Pre- EMI v/s Full EMI – What You Should Know

  1. Make sure Builder has received Commencement Certificate (CC):

Even before signing any document with regard to such under construction projects. Check if the builder has all necessary documents and approval for this project commencement. Every builder of such projects should compulsorily get a Commencement Certificate (CC) to initiate the process.

  1. Contact the Lender to Know if Loan is Approved:

Though builder has offered to you all necessary documents and is ready to share any further information with regard to the project, it is the buyers’ responsibility to contact the financier/ bank to check if the loan is approved and the credit-worthiness of the builder. Buyer has every right to scrutinize the builder’s legitimacy. Do a thorough research on the project, builder and the land with the help of an advocate.

  1. Wait for Appreciation on the Property Value:

You might have entered into an agreement to purchase under construction project with the mind-set of appreciation of the property value by the time construction is complete. At times the property would not have appreciated as per your expectations, but it is advisable to wait for longer period to get the actual benefit of land value appreciation. Be it any type of land investment 8-10 years is a reasonable period to get a good appreciation. Don’t make hasty judgments and remain calm.

First Time Home Buyer’s Guide

Buying a house is a huge investment, thus do not sign any documents without reading and understanding it complete. Take time to go through all the specifications of the under-construction projects and understand what is your benefits and what is the builder’s benefit. Do a research to understand the actual value of the property in the locality and what the builder is quoting to you. This information will help you in negotiating the property price with the builder.

In case of any issues always keep the builder and banker informed.  Grab the opportunity of buying an under construction project to customize the house as per your needs. Most of the builders will be ready to make some basic changes to your space. If the customization request goes beyond the budget, then there could be additional charges. Most importantly, make sure a very good relationship is maintained with the builder and banker. Do not delay any payments unnecessarily.

Things to check with your Builder before you avail an Under-Construction Home Loan.

  • Make sure your builder has all the necessary approvals along with the documents.
  • Before starting the construction work of any building, builders have to take a commencement certificate and several other approvals from the local and other authorized bodies. Lacking with these documents can become a hindrance in the project completion, and even if the completed project may turn into an illegal one.
  • Your builder should be a registered builder
  • Before you buy a property from any builder make sure that the builder is registered with the concerned authorities. registration of your builder is a major factor to determine your creditworthiness with lenders.
  • Convenient Payment Plan
  • Your builder should offer you a repayment structure scheduled according to their estimates. This can also be negotiable if you try. It’s important to make sure that you may not pay the bulk of the payment before the project is completed.

Loan Disbursal Process for Under Construction Properties

In an under-construction property loan, banks do not disburse the loan amount in one-shot to the borrower but it is done in instalments. However, you may be expected to pay the EMI on the sanctioned loan amount and not the disbursed loan amount, but in a home loan for under construction property you need to pay the EMI only on the disbursed amount or you need to pay the EMI just for the interest of your borrowed amount.

For example, if you avail a home loan of INR 70 lakhs for a property which is under construction then in this case and the bank will not disburse the whole INR 70 lakhs at one time. The disbursement will be done in instalments. Suppose at first disbursement of INR 20 lakhs is made to the builder, now you have to pay the EMI just on the interest, not on the total amount.

Tax Benefits for Home Loan on Under Construction Property

A home loan taken for an under construction property can be claimed for tax benefits but it can be done only after receiving the Occupancy Certificate from the builder or after acquiring the possession.

The time period for a home loan of under construction is generally divided into two parts. The time period for which the loan has been taken to the time before starting the construction of the home is known as “pre-construction period”. Whereas the time period till the construction is complete or acquisition is made, the time period is known as “Prior Period”. The interest which is paid in these two periods against the loan is called PPI (Prior period Interest)

Tax benefit on under construction property

For a home loan of under construction property then it is possible to get tax benefits up to INR 2 Lakhs on the interest payments made in a year and up to 1.5 Lakhs towards the principal payments made under Section 80C of the Income Tax Act. However, it is important to know that this tax benefit is not be availed if the home loan payments are during the pre-construction phase. There is some purchase wherein the borrower doesn’t need to pay a penny towards loan repayment EMI. In such cases, the tax deductions are not applicable. The property which is still under construction will not attract any type of tax benefits for the interest paid on EMI- Section 24 of IT Act

  • Right from the time when the construction is complete deduction can be enjoyed up to 5 instalments on pre-construction period interest.
  • Until the construction work is complete or acquisition is made, this period is called as “Prior Period”.
  • The time period between the money was borrowed up to the construction of the house is called as “Pre-construction” period.
  • Until the borrower gets the possession of the house, they have to just pay interest on the loan amount borrowed to the lender, this is called as “PPI- Prior Period interest”.
  • If one repays the principal amount during the pre-construction period to the lender, then they are not eligible for the tax deductions.

All the tax deductions are possible under Section 80C of the IT Act but only if the payment is made irrespective of for which year it is made. The amount paid towards registration and stamp duty is also applicable for tax deductions under 80C even if the borrower has not taken any loan. To enjoy any tax deduction benefit it is equally important that the borrower should furnish house construction completion certificate from the builder.

(Updated 16-05-2019)