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Often people pick booking under-construction properties over ready houses because of their lower rates. However, they do so without realising the risks involved; both, the income tax and financial implications. This feature deals with the income tax aspect of buying an under-construction property.
Benefits of interest on home loan
With skyrocketing property prices, especially those in the metro cities, it is almost impossible for an average person to own a house without a home loan. Section 24(b) of the Income Tax Act, 1961, allows a deduction for interest paid on money borrowed for the purchase/construction/repairs of a house. However, this can be claimed after the construction of property is complete and you have taken possession. The interest paid during the construction period is allowed to be claimed, over a period of five years in five equal installments, beginning from the year of possession. In the case of a self-occupied house property, the maximum amount of deduction available for interest is restricted to Rs 2 lakhs. If the interest for the current period itself exceeds this amount, you effectively lose your claim in respect of interest paid during the construction period. Moreover, if you sell this property before five years are completed, your right to claim the pre-EMI interest for the remaining years, is lost forever.
In case the possession of the property booked under construction, which is proposed to be self-occupied, is delayed beyond five years from the end of the financial year in which the loan was taken, your right to claim interest on such a loan also gets curtailed to Rs 30,000 as opposed to the normal Rs 2 lakhs. There’s already a risk of delay and/or default for an under-construction property. Furthermore, it also results in lower tax benefits should the developer delay possession of the property beyond five years.
In case you have to sell the under-construction property before possession, you altogether lose your tax benefit in respect of interest paid for such property. Though you can add this in your cost of acquisition of the property for capital gains purpose but the matter may get litigated, in case the assessing office takes a different view.
Tax benefit on principal repayment
Section 80C of the Income Tax Act allows a deduction of Rs 1.50 lakhs for principal repayment of the housing loan taken from specified entities. This benefit also is available only after you have taken possession. In case of delayed possession and payment of EMI (interest and principal) has commenced, you lose the tax benefit for such principal repayment forever, as there is no provision for amortisation of this benefit.
Exemption from long-term capital gains
Section 54 and 54F of the Income Tax Act, allows an exemption from long-term capital gains. This is applicable to the amount of capital gains in case of the sale of a residential house if the amount of net consideration in case of other assets, is invested in the construction of another residential house within three years from the date of sale of the asset. If possession is delayed beyond the stipulated time period, you may have to pay capital gains tax which you had planned to save. However, there have been cases where the courts have allowed people to claim the tax benefit under Section 54 and 54F if a substantial amount has been invested. The relief may not come easily and you may have to litigate to be able to claim the benefits of long-term capital gains.
The decision to go for an under-construction property has some income tax implications in addition to the risk of default and delay.
(The author is a taxation and home finance expert, with 30 years’ experience)