Buying an under-construction property with a home loan can be a smart financial move, but it comes with unique tax implications. Unlike ready-to-move properties, tax benefits on an under-construction home are structured differently under Indian tax laws. While the principal repayment under Section 80C and interest deduction under Section 24(b) provide relief, these benefits are only available after possession. Additionally, understanding pre-EMI interest deductions and GST implications is crucial for maximising tax savings. This article delves into the tax benefits associated with home loans for under-construction properties in India and how homebuyers can make the most of them.
Tax Benefits on Home Loans for Under-Construction Properties
Tax benefits on home loans for under-construction properties differ from those on completed properties. While borrowers can claim deductions on both principal repayment and interest paid, these benefits are subject to specific conditions and timelines. Below is a detailed breakdown of the tax benefits available:
Tax benefits on interest paid under Section 24(b)
Under Section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to Rs 2 lakh per year on the interest paid for a self-occupied property. However, this benefit applies only after the construction is completed. Until possession, the interest paid during the construction period (pre-construction interest) cannot be claimed immediately but can be deducted in five equal installments starting from the year of possession.
It is important to note that if the construction is not completed within five years from the end of the financial year in which the loan was taken, the maximum interest deduction is capped at Rs 30,000 per year instead of Rs 2 lakh.
Tax benefits on principal repayment under Section 80C
Deductions on principal repayment fall under Section 80C, with a maximum limit of Rs 1.5 lakh per year. However, this benefit is available only after the possession of the property. Any principal repaid before the construction is completed does not qualify for deductions.
Additionally, to retain this benefit, the property cannot be sold within five years of possession. If the property is sold earlier, all deductions claimed under Section 80C will be added back to the taxable income in the year of sale.
Pre-EMI interest deduction
When a home loan is taken for an under-construction property, borrowers often pay a pre-EMI, which consists only of the interest component until the property is completed. Unlike a full EMI (which includes both principal and interest), pre-EMI payments do not contribute to loan repayment but are a temporary financial commitment during the construction phase.
The interest paid during the pre-construction period (before possession) is not immediately eligible for tax deduction. However, under Section 24(b) of the Income Tax Act, borrowers can claim this amount in five equal annual installments, starting from the year the construction is completed.
Conditions for claiming tax benefits on home loan for an under-construction property
To claim tax benefits on a home loan for an under-construction property, borrowers must meet certain conditions set by the Income Tax Act. Failing to comply with these conditions may result in the loss of deductions.
- Completion of construction within five years: Tax benefits on home loan interest under Section 24(b) are applicable only if the construction is completed within five years from the end of the financial year in which the loan was taken. If delayed, the maximum interest deduction is reduced to Rs 30,000 per year instead of Rs 2 lakh.
- Possession of the property: Tax deductions on both principal (Section 80C) and interest (Section 24(b)) can only be claimed after taking possession of the property. No tax benefits are available during the construction phase except for the deferred pre-EMI interest deduction in five installments.
- Property should not be sold within five years: Under Section 80C, if the property is sold within five years of possession, all tax benefits claimed on the principal amount will be reversed, and the claimed deductions will be added back to taxable income in the year of sale.
- Loan must be taken from an approved lender: The home loan must be obtained from a recognised financial institution such as a bank, housing finance company (HFC), or an approved NBFC. Loans from friends, family, or unregistered lenders do not qualify for tax benefits.
- Borrower must be the legal owner: Only the legal owner(s) of the property can claim tax benefits. If a home loan is taken jointly, both co-borrowers can claim deductions separately, provided they are also co-owners of the property.
Tax benefits on home loans for under-construction vs ready-to-move properties
The tax treatment of home loans varies significantly between under-construction and ready-to-move properties. Understanding these differences helps borrowers make informed financial decisions.
| Factor | Under-Construction Property | Ready-to-Move Property |
| Interest Deduction (Section 24(b)) | Interest paid during construction cannot be claimed immediately. After possession, it can be claimed in five equal installments, subject to a Rs 2 lakh annual cap (if construction is completed within five years). | Full interest deduction is available from the year of purchase, up to Rs 2 lakh per year for self-occupied properties. No five-year restriction applies. |
| Principal Deduction (Section 80C) | No deduction on principal repayment until possession. Post-possession, it can be claimed up to Rs 1.5 lakh per year under Section 80C. | Principal repayment is eligible for deduction up to Rs 1.5 lakh per year from the year of purchase. |
| Pre-EMI Interest | Interest paid during construction (Pre-EMI) can be claimed in five equal installments after possession but within the Rs 2 lakh annual cap under Section 24(b). | Not applicable as EMI starts immediately, and full tax benefits are available from the start. |
| Possession Timeline and Risk | High risk of construction delays, which can affect eligibility for tax benefits (e.g., if possession is delayed beyond five years, the interest deduction cap reduces to Rs 30,000 per year). | No risk of delay, and tax benefits start immediately. |
| GST Applicability | 5% GST applicable (1% for affordable housing) on purchase price, increasing the total cost. | No GST on ready-to-move properties, making them relatively cost-effective. |
| Renting potential | Cannot be rented out until possession, leading to financial burden if there are delays. | Can be rented out immediately, providing a potential rental income stream. |
| Property Price and Appreciation | Generally available at lower prices than ready properties. Potential for appreciation by the time construction is completed. | Price is typically higher than under-construction properties, but immediate usability and tax benefits compensate for the cost. |
Claiming home loan tax benefits on under-construction property: Common mistakes to avoid
While home loan tax benefits on under-construction properties can lead to significant savings, many buyers make mistakes that reduce their benefits. Here are some common errors to avoid:
- Not keeping track of pre-EMI interest: Many homebuyers fail to keep records of their pre-EMI interest payments during construction. Remember, this amount can be claimed in five equal installments after possession under Section 24(b). Ensure you collect loan statements from your lender to track this properly.
- Assuming tax benefits start immediately: Tax benefits on principal and interest repayments are only applicable after possession. Many buyers mistakenly claim deductions before receiving occupancy, which can lead to rejection during tax filing.
- Missing the five-year construction deadline: If the construction of the property is not completed within five years from the end of the financial year in which the loan was taken, the maximum deduction for interest paid reduces from Rs 2 lakh to just Rs 30,000 per year. Delayed projects can significantly impact your tax savings.
- Not understanding GST impact: Unlike ready-to-move properties, GST (5% or 1% for affordable housing) applies to under-construction properties. Buyers often overlook this cost, affecting their total budget and tax planning.
- Failing to claim principal deduction on time: Under Section 80C, principal repayment is eligible for tax benefits only after possession, with a cap of Rs 1.5 lakh per year. Some buyers miss out by not including this deduction in their returns.
- Selling the property before five years: If you sell the property within five years of taking possession, all principal repayment deductions claimed under Section 80C will be reversed, and the amount will be added to your taxable income in the year of sale.
- Not collecting proper documentation: To claim tax benefits, ensure you have the loan sanction letter, EMI payment receipts, possession certificate, and interest and principal repayment certificate from the lender.
Housing.com POV
Understanding home loan tax benefits on an under-construction property can help you make informed financial decisions and maximise your savings. While interest deductions and principal repayment benefits offer significant relief, they come with specific conditions, such as the five-year construction timeline and post-possession eligibility. Being aware of the key differences between under-construction and ready-to-move properties, avoiding common mistakes, and maintaining proper documentation can ensure smooth tax claims. Before investing, carefully assess your loan structure, tax implications, and project completion timelines to make the most of your home loan benefits.
FAQs
Can I claim tax benefits on an under-construction property if the builder delays possession?
If construction exceeds five years from the loan’s start date, the interest deduction limit reduces from Rs 2 lakh to Rs 30,000 per year. However, delays beyond your control do not affect the principal deduction under Section 80C.
Are GST payments on under-construction properties eligible for tax benefits?
No, GST paid on an under-construction property is not eligible for tax deductions under Sections 24(b) or 80C. However, you can factor GST costs into the total property value when calculating capital gains at the time of sale.
Can I claim tax benefits on home loan prepayment for an under-construction property?
Yes, prepayments made toward the principal are eligible for deductions under Section 80C, up to Rs 1.5 lakh per year. However, interest prepayment benefits can only be claimed after property possession, in five equal installments.
Will I lose tax benefits if I sell the under-construction property before possession?
Yes, tax benefits claimed on interest and principal will be reversed if you sell the property before taking possession. Any gains from the sale may also attract short-term capital gains tax based on your holding period.
Can co-borrowers claim tax benefits on an under-construction home loan?
Yes, if co-borrowers are also co-owners, both can claim deductions individually under Sections 24(b) and 80C, in proportion to their loan repayment. However, benefits on interest payments can only be availed post-possession.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
