Written By- Jaya Pathak
Buying a home is a dream of many but it requires a home loan to finance. The home loans come with the benefit of tax deductions on principal and interest payments, but many borrowers are often unsure whether they can claim their tax benefits on an under-construction property. It is quite important as the real estate developers often take years to complete the construction and home buyers might still be repaying their monthly installments without having the possession of property.
In this blog, we will discuss whether home loan tax benefit is available for an under-construction property.
Understanding home loan tax benefits
The tax benefits on joint home loans can be availed under different sections of the Income Tax Act, 1961. Both the co-borrowers can claim deductions separately if they meet certain eligibility criteria. The tax benefits on home loans are listed below-
- Under section 80 C, co-borrowers can claim a deduction of up to rupees 1.5 lakh each for the repayment on the principal amount taken for a home loan. The co-borrowers must also be the co-owners of the property. The house which is set as a collateral must not be sold within five years of purchase, otherwise deductions claimed earlier will be reversed. This deduction is applicable only for the loans which have been taken from approved financial institutions.
If both the applicants qualify for the deduction on principal repayment, then they can claim a total deduction of ₹3,00,000 on principal repayment, significantly reducing the taxable income. - Under section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to 2,00,000 each on the interest to be paid for a self-occupied home. The home loan must be taken for the purchase or the construction of a house, construction may be completed within five years from the end of the financial year in which the loan was taken, a maximum deduction is available per co-borrower is rupees 2,00,000, provided they contribute to the repayment.
For example, if a couple has taken a joint home loan and pays 4,00,000 in interest annually, both can claim ₹2,00,000 each, totalling 4,00,000 deductions under section 24(b). - To encourage the first-time home buyers, government provide additional deductions under section 80 EE and 80EEA. In section 80 E, an additional deduction of rupees 50,000 on the interest paid for the first time home buyers is offered to the borrower, if the loan amount does not exceed ₹35,00,000 and the value of property is below 50,00,000. In section 80 EEA, an additional deduction of one 1.5 Lakh rupees is provided to the borrower on interest paid for loans taken under the affordable housing scheme.
This scheme is applicable to the home loans which is sanctioned between April 2019 and March 2022.
Understanding the tax benefits on an under construction property
- Under section 80 C, a home buyer can claim a deduction of up to 1.5 lakh per year on the principal repayment on the home loan. This benefit is not available for an under-construction property. The deduction can be claimed once the construction is completed, and property is registered in the name of the owner. The tax benefit apply is after the completion of construction. If the property is sold within five-year possession, deductions will be reversed and added back to the taxable income in the year of sale.
- An interest payment on home loan qualifies for tax deduction under section 24(b). For a self occupied property, the maximum deduction is 2,00,000 per year. However, for an under-construction property the deduction works differently. The interest paid during the construction can be claimed in five equal installments, starting from the financial year in which the construction is completed. The preconstruction interest is accumulated which can be claimed in five equal parts starting from the year of possession. Along with this the regular interest paid after possession can also be claimed.
- The government has introduced some additional tax benefits for first time home buyers in order to encourage the real estate involvement. In section 80EE, an extra deduction of rupees 50,000 is provided on home loan interest for first time buyers if the loan amount Is greater or equal to ₹25,00,000 and the value of property is above ₹50,00,000. In section 80EEA, an additional deduction of rupees 1.5 lakh is paid on affordable housing loan sanction between April 2019 and March 2022.
Conditions to claim tax benefits
If you want to avail the benefits of tax for an under-construction property, you must adhere that tax benefits is applied only after construction is completed and the buyer has received the possession of property. The total interest deduction under section 24(b) is available only if the construction is completed within five years from the end of the financial year in which the loan was taken. If the possession is delayed beyond five years, and interest deduction limit reduces to ₹30,000 per year.
The borrower must be the legal owner of the property, and he must be repaying the loan in order to claim deductions. The loan must be taken for the buying or construction of property. The loans taken for renovation or repairs do not qualify for the tax benefits.
Benefits of claiming tax deductions on an under-construction property
- It reduces the tax liability as you can claim free construction interest in installment which helps to reduce the taxable income after possession. S
- It encourages early investment. Owners can benefit from accumulation of interest deduction and making an under-construction property financially attractive.
- It will maximize the overall saving as various deductions are claimed under income tax sections which can significantly lower tax liability.
- It promotes long term financial planning. If you will know that how the text benefits work allows home buyers to plan their financials effectively then it can reduce the long-term tax outflow.
Mistakes to avoid
- Many home buyers assume that they can claim tax deductions immediately after taking a loan. However, deductions are applicable only after completion of construction.
- If the construction is delayed beyond five years, then the interest deduction limits dropped to ₹30,000 leading to lower tax savings.
- If you want to claim deductions then you must have proper documentations such as home loan statements, interest certificates and possession proof.
- If the property is sold too early, then deductions can be claimed under section 80C which will be reversed to additional tax liability.
Conclusion
The tax benefits on home loans provide financial relief. But the rules for an under-construction property differ from those of a ready to move in home. In order to maximize tax savings, the buyers can ensure timely construction completion, maintaining a proper loan documentation and leveraging the additional deductions under various sections. Thus, if you’re planning to invest in an under-construction property, you can consult a tax advisor to make the most of your home loan benefits.
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