Buying an under construction property can be an exciting venture, offering flexibility and potential cost savings for buyers in India. However, it’s essential to understand the nuances of the tax implications before making a purchase, such as the tax benefit available on home loans for under construction properties.
In this blog, we will explore everything you need to know about the under construction property tax benefit, including what it entails, how it affects your finances, and the key terms you need to be aware of. We’ll also discuss the advantages of opting for an under construction home loan, the pre-construction interest, and how these elements can impact your overall financial planning.
Understanding the Tax Benefit on Under Construction Property
The under construction property tax benefit offers tax advantages for homebuyers in India taking a home loan for an unfinished property. This benefit is provided to make homeownership more affordable and to encourage individuals to invest in property at an early stage of development. The primary advantage of this benefit is its ability to claim deductions on the interest paid on the loan during the construction period.
Under Construction Home Loan Tax Benefits
These are the tax benefits of an under construction home loan:
- Interest Deduction: Homebuyers can deduct the interest paid on the under construction home loan from their taxable income under Section 24(b) of the Income Tax Act up to a maximum limit. This deduction can be claimed from the year the construction is completed.
- EMI Payments: Even though the property is under construction, such as the individual house for sale in Kelambakkam, you can start repaying the EMI (Equated Monthly Instalment) towards the loan interest, and these payments are eligible for a tax deduction.
- Loan Disbursement: The tax benefit applies to the interest paid on the loan amount disbursed, which covers the pre-construction period interest as well.
What is Pre-construction Interest on Income Tax?
Pre-construction interest is the interest paid on a home loan before the property is completed and ready for possession. Typically, home loans for under construction properties involve a moratorium period during which only the interest is payable, and the principal repayment starts after possession. The benefit here is that this interest can also be claimed as a deduction under Section 24(b) of the Income Tax Act.
Tax Benefit on Home Loan Before Possession
The tax benefits on a home loan before its possession are:
- Claiming Deductions: Both principal repayment (under Section 80C) and interest on home loans are eligible for deductions. However, the deductions can only be claimed post-possession. The tax deduction on the interest component for under construction properties can be claimed from the year the property is handed over to you.
- Documents Required: To claim these benefits, you must have possession-related documents such as the completion certificate or occupancy certificate.
How Pre-construction Interest Affects Your Income Tax?
Pre-construction interest affects your income tax in multiple ways:
- Interest Accrual: During the construction period, interest is charged on the loan amount disbursed. This interest is added to the principal amount (capitalised) and repaid in EMIs after possession.
- Deductions: Once the property is ready for possession, the capitalised interest and the regular interest paid becomes eligible for deduction under Section 24(b).
- Taxable Limit: There is a maximum limit of ₹2 lakh per financial year on the total interest paid for an under construction property loan. Any amount above this limit cannot be claimed as a deduction.
Impact on Your Financial Planning
An under construction home loan affects your financial planning in multiple ways:
- Cash Flow Management: Since the interest on the loan is deductible, it can significantly reduce your taxable income. However, this is only applicable once the construction is complete and the property is ready for possession.
- Investment Timing: Planning your investment in an under construction property carefully can allow you to benefit from the interest deduction over the construction period and beyond.
Key Considerations Before Buying an Under Construction Property
Investing in an under construction property can be a promising opportunity, but it’s crucial to carefully evaluate key factors before taking the plunge.
- Home Loan for Under Construction Property
- Eligibility Criteria: Lenders assess your eligibility based on factors like credit score, income level, and existing debts. It’s crucial to have a good credit history to avail of attractive interest rates and better terms.
- Loan Disbursement: Unlike ready properties like Casagrand Suncity, under construction properties have payments that are made in stages linked to the construction progress. This can be less favourable than a one-time disbursement for a property like Casagrand Suncity.
- Tax Benefits on Under Construction Home Loan
- Dual Benefits: You can avail of both principal repayment and interest deduction benefits under Section 80C and Section 24(b), respectively, once the construction is completed and you take possession.
- Possession Certificate: To claim these benefits, ensure you receive a possession certificate or occupancy certificate from the builder or developer.
- Documentation Required
- Possession Certificate: For claiming tax deductions, it’s essential to have the possession certificate from the builder. This document validates that the property is ready for occupancy.
- EMI Payment Proof: Keep track of EMI payments and interest statements from your lender to substantiate your claims.
- Financial Planning
Make sure you plan your tax liabilities effectively to make the most of the deductions available for under construction properties. Consulting a financial advisor can provide valuable insights and guidance.
Making a Sound Investment Decision for Your Future Home
Understanding the under construction property tax benefit is crucial for anyone considering buying a property still in the building phase. The ability to claim deductions on interest and principal payments can provide significant financial advantages, especially in the initial years of the loan.
Before making a decision, it’s important to consider these benefits alongside factors like the developer’s track record, completion timelines, and your financial readiness for an under construction property. By being informed and proactive, you can maximise your savings and make a sound investment in your future home.
