Nowadays people prefer booking under-construction properties due to rate difference as compared to ready-to-move-in property and ease of payment. In addition to having credit risk on the builder, buying an under- construction house or constructing house on our own plot has different tax implications than buying a ready to move in house. This also involves different modalities for arranging finance. In this article I intend to cover both the tax and home loan aspect for an under-construction and self-constructed property.
Home loan eligibility:
The lenders treat loan taken for ready house property and for an under-construction property on the same footing except that in case of an under-construction property, the lender will disburse the loan in stages on the basis of stage of completion of construction. In case of self-construction, the buyer can go for a composite loan which would include the cost of the plot and the cost of construction, both.
It is interesting to note that the bank will not disburse any amount until you have fully paid in your full contribution. The lender releases money in tranches on the basis of certificate provided from an architect or civil engineer. You may also have to submit photograph in support of the stage of completion of the construction. In some cases the lender may depute its own architect for issuing such certificate instead of relying on the certificate furnished by you.
Repayment of such loans in the form of EMI (Equated Monthly Instalments) starts once the loan is disbursed fully which normally coincides with completion of the construction. Please note it is not necessary that the EMI will start only from completion of the construction. Till such time your regular EMIs start, you may have to pay interest on the money already disbursed by the lender. This is known as pre-EMI interest.
As per the provisions of Section 80 C, you are entitled to claim deduction upto Rs.1.50 Lakhs for principal repayment of the home loan obtained from banks and Housing Finance Companies along with other eligible items like ULIP, PF, PPF, ELSS and NSC etc. The deduction for repayment of home loan is available only from the year in which possession of the residential house is taken. However if you have already started paying regular EMIs before completion of the property, you cannot claim any deduction for any principal repayment till construction is complete and possession is taken. Moreover in case you sell such property within five years from the end of the financial year in which construction is completed it has tax implications. All the deductions claimed by you on account of such repayment will be reversed and shall be treated as income of the year in which you sell such property. This deduction is available in respect of residential house property only.
In addition to rebate for repayment, you can claim interest paid on such loans under Section 24 (b). The benefit of interest can likewise only be claimed from the year in which construction is completed. However unlike for principal repayment before completion of the construction, you do not lose your right to claim for interest paid during construction period. For all the interest paid before completion of the construction, you are allowed to claim the accumulated interest paid upto the year before completion of the construction in five equal instatements along with your regular interest for the year.
In case the property is self-occupied, the deduction is restricted to Rs. 2 Lakhs however this claim of Rs. 2 Lakhs goes down to Rs. 30,000 in case construction of the house is not completed within a period of three years from the end of the year in which such loan was taken. In case you have more than one self-occupied property, you have to treat one such property as let-out and others are treated as deemed to have been let-out.
The reversal of tax benefits is not applicable in case of interest in cases where the house is sold within five years as explained above. Investment in self-constructed house also entitles you to claim exemption from capital gains on sale of any other capital asset if construction is completed within three years from the date of sale of the asset.
This way we see that the construction of house gives you many benefits but the various time limits have to be met so as not to lose the benefits associated with the construction of a house.