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There are a number of income tax provisions, which link the benefits with the time taken to complete the construction of one’s property.
Deductions pertaining to repayment of the principal component of a housing loan
Section 80C provides tax benefits on the repayment of a home loan’s principal component, up to Rs 1.50 lakhs. In case of an under-construction property or for self-construction of a property, your EMIs do not start till the entire loan amount is disbursed and this generally coincides with the completion of construction. In case of any inordinate delay in construction, your EMI may start even before completion of the construction. In such a situation, you will not be able to claim tax benefits on principal repayments, as the same is allowable only in respect of a property, income from which is taxable under the head ‘income from house property’. Unless the property is completed and its possession taken, the same cannot become taxable. Therefore, in case of such delays, you lose the benefit available on repayment of the principal amount of the loan, before taking the possession.
Deductions pertaining to interest paid on loan taken for construction of a house property
Section 24 of the Income Tax Act provides deductions, with respect to the interest paid on money borrowed for the purchase, construction, repairs, renovation or reconstruction of a house. Unlike Section 80C, Section 24 allows you to claim tax benefits on the interest paid during the period before you took possession (referred to as pre-EMI interest), in five equal instalments beginning from the year of completion of construction. Consequently, if there are delays in completion of construction, your right to claim the interest paid on the loan will also be delayed.
Moreover, the period taken for completion of the construction, will also determine the amount which you can claim for interest, in case the house is self-occupied. If construction is completed within five years from the end of the financial year in which the money was borrowed, you can claim interest up to Rs 2 lakhs. However, in case the delay exceeds five years, your entitlement gets curtailed to Rs 30,000 in a year.
This amount of interest entitlement is for the current year’s interest, as well as for amortised portion of the pre-EMI interest, taken together. It may be noted that for a let-out property, you can claim full interest benefit, even if construction is delayed, subject to limitations of entitlement to claim set off of losses under the head ‘income from house property’ against other eligible incomes.
Importance, for claiming exemption on capital gains
Section 54 and 54F provide for exemption from long-term capital gains tax, if the gains are invested in a new house that is constructed within three years. However, in the case of Kishore H Galaiya Vs ITO, decided in 2012, the Mumbai tribunal held that even if a substantial amount is invested/spent for construction of the house and even though construction is not completed in three years, the exemption under Section 54 and 54F would be available. However, in case of delay in completion of construction, the income tax officer may take a different view and you may have to file an appeal with a higher authority, to claim the exemption. Hence, it is always advisable to ensure that the construction is completed within three years, to avoid any litigation.
(The author is a tax and investment expert, with 35 years’ experience)