A property seeker can either buy a flat that is ready-to-move-in, or book an under-construction property. While these are the preferred options, one can also get their own house constructed on a plot of land.
Self-construction of a house: Home loan eligibility and application procedure
The amount of home loan eligibility and the rate of interest, are not affected by whether you buy a ready-to-move-in house, or book an under-construction property, or plan to get your own house constructed. However, the process, for making the home loan application and disbursement of the loan, differs. The number of lenders willing to give a loan for self-construction is limited, as compared to those who are willing to lend for a ready or an under-construction house, due to problems of evaluation and monitoring.
For a ready-to-move-in house, as well an under-construction property, you need to submit your income documents and the sale agreement/agreement for sale, before the bank disburses any money. Once the full documentation part is complete, the bank pays the entire amount of the loan, in case of a ready-to-move-in house. For an under-construction property, the loan is not disbursed at one go and is generally disbursed in tranches, based on the demand raised by the builder and is linked to the stage of completion of the construction.
In case of self-construction, the lender gives the home loan as a composite loan, to cover the cost of the land and the cost of construction. While computing the margin money payable, the lender will consider the market value of the land and will include it in the full cost of the house. Lenders generally give loans of up to 80% of the full cost. However, in no case will the amount of loan exceed the cost of construction, if you have already bought the land long ago. To apply for a composite home loan, in addition to your income papers and the title deed of the land, you will also have to submit an estimate for the cost of construction, duly certified by an architect or a civil engineer. In case the land is also being bought simultaneously, the lender will expect you to first pay the margin money fully, before disbursing any money. The lender will disburse the loan in part, on the basis of certificate/s of an architect or civil engineer about the progress of construction. You also have to submit photographs, in support of the stage of completion of the house. The lender may depute its own architect, for verification of the stage of completion of the construction, instead of relying on the certificate/photo furnished by you, if it wishes.
Repayment of such loans as EMI (equated monthly installments) starts, once the lender has disbursed the full loan, which normally coincides with the completion of the construction. However, it is not necessary that the EMI will start only after completion of the construction. In case of any delay in completing the construction, your regular EMIs may start before completion of the contract. You may have to pay the interest on the money already disbursed. This is known as pre-EMI interest.
Tax provisions for self-constructed properties
As per Section 80 C of the Income Tax Act, you are entitled to claim up to Rs 1.5 lakhs for repayment of the principal amount of the home loan, along with other eligible items like life insurance premium, PF, PPF, ELSS, NSC, etc. The deduction is available for the full year, from the year in which the construction is completed. So, even if you get the house completed on March 31, you will be able to claim the deduction for the principal amount repaid during the year.
However, if you have already started paying EMI before the completion of the house, you cannot claim any deduction on account of any such principal repayment, till house is completed. Moreover, if you sell/transfer the property so constructed, within five years from the end of the financial year in which the construction of the house was completed and its possession was taken, all the deductions claimed for such repayment shall have to be reversed and treated as income of the year in which the property is sold/transferred. Also, no deduction will be available in the year of such transfer. The reversal will apply even if you gift away the property.
In addition to the deduction for repayment of the principal amount, you are also allowed to claim deduction under Section 24 (b) for the interest paid on such home loans. The benefit for interest can also be claimed, only from the year in which the construction of the property is completed. However, unlike principal repayment, you do not lose your right to claim the interest paid before completion of the construction. You are allowed to claim the accumulated interest paid, till the year prior to the one in which the house is completed, in five equal installments, along with your regular interest for the year.
The amount of interest that you can claim on the home loan, depends on whether the property is self-occupied or let out. For a maximum of two self-occupied properties, you can claim up to Rs 2.5 lakhs in a year in aggregate, as deduction for interest. However, this claim of Rs 2.5 lakhs gets restricted to Rs 30,000, if the construction of the house is not completed within five years from the end of the year in which the loan was taken.
In case the house is let out, you can claim full interest deduction with respect to such loan. However, in case there is a loss, as computed under the head ‘Income from house property’, for all the properties owned by you taken together, then, you are allowed to claim a set-off of such loss, to the extent of Rs 2 lakhs only, against the other incomes of the current year. The loss remaining unabsorbed is allowed to be carried forward and set-off against the positive income under the same head, for eight subsequent years. It is interesting to note that there is no provision for reversal of tax benefits availed under Section 24(b), if the house is sold subsequently.
(The author is a tax and investment expert, with 35 years’ experience)