Under-construction Home Loan Tax Benefits
Most of us know that a home loan borrower can enjoy tax benefits on the principal and interest amount that is paid towards the loan. But only a few of us are aware of the benefits available to those who have availed a home loan for construction of their home.
Yes, even if your property is still under construction, you can still enjoy the benefits of tax deductions by some smart moves. This content will help you in understanding how to be a smart borrower and save some money from being taxed when you have a home loan taken for a house that is still under construction.
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If you have a home loan for an under construction property then it is possible to claim for tax deductions. A tax deduction up to ₹ 2 Lakhs on the interest payments made in a year and up to ₹ 1.5 Lakhs towards the principal amount made under Section 80C of the Income Tax Act.
However, it is important to keep in mind that this under construction home loan tax benefit cannot be availed if the home loan payments are during the pre-construction phase. There are certain types of property purchase wherein the buyer does not have to pay a penny towards loan repayment EMI. In such cases, these tax deductions are not applicable.
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Any property that is still under construction will not attract any type of tax for the interest paid on EMI- Section 24 of IT Act
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Right from the year, the construction is complete deduction can be enjoyed up to 5 installments on pre-construction period interest
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Until construction is complete or acquisition is made, the period is called “Prior Period”
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The period between when the money was borrowed up to the construction of the house is called as “Pre-construction” period
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Until the possession of the house, the borrower just needs to pay interest on the loan amount borrowed to the lender, this is called as “PPI- Prior Period interest”.
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If the home loan amount is utilized by the borrower for renewal, repairs or reconstruction, then tax deduction benefits cannot be availed.
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If you repay the principal during the pre-construction period, then you are not eligible for any kind of tax deductions.
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Tax deduction benefit cannot be availed when you buy a plot or a piece of land.
All tax deductions under Section 80C of the IT Act is possible only if the payment is made irrespective of for which year it is made. Any amount paid towards registration fees or stamp duty is also applicable for tax deductions under 80C even if the borrower has not taken a loan. To enjoy this benefit it is important that the borrower should furnish house construction completion certificate.
Pre- EMI v/s Full EMI – What You Should Know
Having said all these, it is important to be aware of the fact that the assessee who enjoyed tax deductions is bound to repay the deduction amounts in case if he/ she sells the property within 5 years from the end of Financial Year in which possession of house has been obtained. The deductions will be reclaimed by the Indian Government under Section 80C during the financial year when the house property was sold. If the home loan taken is not for self-occupation purpose then whole interest amount can be claimed as tax deductions under Section 24. There is no maximum limit for claiming tax deductions for not self-occupied property.
Tax deductions under Section 24 are for interest on the home loan and this is on the accrual basis. Thus all deductions have to be claimed under Section 24 the same year even if no payment is made. It is also important that the construction of the house should be completed within 3 years of taking a loan. Tax deduction on interest beyond this period is not applicable.
Deductions Allowed under Section 24 for Interest Payments made on Home Loans
| Type of Property | Self-Occupied Property | Not Self Occupied Property | ||
| Completion Status | Completed within 3 years | Not completed within 3 years | Completed within 3 years | Not completed within 3 years |
| Deduction Allowed | Rs. 1,50,000 | Rs. 30,000 | No Limit | No Limit |
Summary of Tax Benefits Available on Home Loans in India Under Section 24 and Section 80C
| Particulars | Section 24 | Section 80C |
| Tax Deduction allowed for | Interest | Principal |
| Basis of Tax Deduction | Accrual basis | Paid basis |
| Quantum of Tax Deduction allowed | Self-Occupied Property: Rs. 2,00,000
Non- Self Occupied Property: No Limit |
Rs. 1,50,000 |
| Purpose of Loan | Purchase/ Repair/ Renewal/ Construction/ Reconstruction of a Residential House Property | Construction/ Purchase of a new House Property |
| Eligibility for claiming Tax deduction | Purchase/ Construction should be completed within 3 years | Nil |
| Restriction on Sale of Property | Nil | Tax Deduction claimed would be reversed if Property sold within 5 years |
Important Points to be Considered for Home Loan Tax Deductions
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As per Shew Kissan Bhatter v. CIT (1973) 89 ITR 61(SC), interest paid on the outstanding amount is not tax deductible
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The tax deduction can be availed only if the construction of the housing property is completed within 3 years of taking a home loan
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Any commission paid towards arranging a home loan is not eligible for tax deductions
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Money spent towards registration of the housing property and stamp duty is eligible for tax deductions
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In case if the house property is not earning any income to the owner and thus the interest of the home loan is a loss, then such loss can be adjusted against income from various other heads within the same financial year
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In case if the loss incurred cannot be set off against income from other heads of the same financial year, such losses can be carried forward up to the next 8 years financial years.
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Only the person who has constructed or acquired the property can enjoy tax benefits. This benefit is allowed to its successor of the property.
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Limit for Home Loan Tax Benefits in India
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The below tax benefits are not for a property but for individual who is owning a house
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In case the property is purchased joint, both the owners can enjoy the benefit, however, the limit together will remain the same
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The percentage of the benefit of the tax deduction is usually calculated on the percentage share of ownership/ EMI payment of the loan amount for joint ownership
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Though you are staying in the rented house and applying for HRA deductions, the benefits of tax deductions for house property under construction can also be enjoyed by a taxpayer.
| Particulars | Quantum of Deduction (Rs.) | |
| Self-Occupied Property | Non-Self Occupied Property | |
| Section 24 | 2,00,000 | No Limit |
| Section 80C | 1,50,000 | 1,50,000 |
| Section 80EE | 50,000 | 50,000 |
In order to claim these tax deductions, it is important to share documents and statements confirming the amount paid toward interest and principal of the home loan. The construction status of the property should be furnished. These will be considered with the taxable income of the individuals and any eligible tax benefits will be deducted.
Though there is strict time-frame to complete house constructions, it is good to avail tax benefits on under construction house property. Any interest paid during the financial year towards the interest of home loan will attract this tax deduction.
In India, all home loans for under construction property is structured in such a way that the instalments are released by the bank according to the construction stage of the property. The regular and timely inspection will be conducted by the bank. The inspection is conducted before releasing each installment in order to ensure that the home loan amount is being utilized for the construction purpose only.
All the above-said tax benefits are applicable only for residential property. Whether it is an independent villa, gated community or even an apartment. It is important to understand the strict timelines on home loan under construction tax benefits and act accordingly to get the benefit to the maximum extent from the home loan. It can always work for your advantage if it is utilized in the right manner.
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What happens if I sell the house property within 5 years of completing its construction through the home loan?
In such cases, tax implications will be attracted towards the home loan. All deductions enjoyed through this featured will be reversed to your income tax calculations. A lump sum amount will have to be paid towards it. It will simply be your income of the particular financial year which is taxable.
On the other hand, if you decide to sell the property to use the fund to invest in a self-constructed house, then it is possible to claim exemptions on capital gains as long as the new property is completed within 3 years of the sale of the old house (asset).
Knowing the terms and conditions and how the tax is calculated on under construction property will help you manage your tax. This will also help you to enjoy a lot of tax benefits. Knowing what can be availed and applying for the same at the right time will help you in getting maximum tax benefits within a financial year. Keep exploring for new tax deductions and changes in the law as this is essential to manage your income and comes to help during tax calculations.
(Updated 16-04-2019)
