Delayed housing project could cost you income tax deduction
May, 12th 2015
EVERYONE dreams to have a home they can call their own. However, due to a variety of issues, delays in completion of housing projects have become commonplace. As a home buyer, you need to be aware of certain tax-related issues in such cases.
The most sought-after deduction for home owners is tax deduction for interest payments on home loans. For a self-occupied property, a deduction of R30,000 per annum is available for interest payable. However, an enhanced deduction of up to R2 lakh per annum for self-occupied property can be availed of if acquisition or construction of the property is completed within three years from the end of the fiscal in which the loan is taken. A delay in project completion beyond three years will lead to loss of enhanced interest deduction for the homeowner.
Further, interest payable on the home loan during the period prior to completion of construction can be claimed as deduction starting with the year of completion of construction. Deduction can be claimed for the aggregate interest for the pre-construction period in five equal installments starting with the year of completion. In case of delayed projects, the interest deduction for the pre-construction period may be partially lost.
Let’s take an example. If the aggregate pre-construction interest for a home buyer increases to R5 lakh due to delay in construction, a deduction of R1 lakh per annum can be claimed over five years, in addition to the yearly interest for the post-construction period. If the interest payable for the first year (year of completion of construction) was, say, R1.4 lakh, the total interest available for deduction for this year (including pre-construction interest) would be R2.4 lakh. However, the total deduction for that year allowed under the law would be restricted to R2 lakh only, thereby resulting in a loss of deduction of R40,000.
Another tax exemption has been provided in respect of reinvestment of sale proceeds of a long-term capital asset into a new house property. One of the conditions is that the new property should be constructed within three years from the sale of the original property. For these exemptions, too, the delay in construction beyond the prescribed limit may jeopardise the entire claim for exemption, and the taxpayer may need to pay capital gains tax despite making requisite investment in a house.
Fortunately for the taxpayer, courts and tribunals have held that intent of the legislation for providing various tax benefits is to encourage investment in residential houses and, therefore, these provisions should be construed liberally. The courts have held that if the taxpayer has invested the requisite amounts, he is entitled to the tax exemption even though the sale deed may have not been executed or construction not completed. In case of delay in completion of construction, it may be possible to avail the tax benefits on one of the above grounds. The government needs to relax requirements for claiming tax exemptions and remove ambiguities.