Many people find it difficult to understand tax things but we will discuss them in such a way that everyone including you can understand easily. Let’s get started!
An under-construction property is a property that is still being built and doesn’t have a completion certificate yet. Builders and developers sell these properties at different stages of construction, so buyers can purchase them before they are finished.
Key Point: Under-construction properties are usually priced lower than ready-to-move-in properties, making them an attractive option for many buyers.
Lower Prices: Under-construction properties are generally cheaper than completed properties.
Payment Flexibility: Buyers often have the option to pay in installments as the construction progresses.
Customization: Buyers may have the opportunity to customize the property according to their preferences.
Potential Appreciation: As the construction progresses, the property’s value may appreciate, offering potential gains.
One of the most significant tax benefits available to homebuyers is the deduction on the interest paid on a home loan. Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to ₹2 lakhs per annum on the interest paid on a home loan for a self-occupied property.
However, there’s a catch: This deduction is only available once the construction of the property is complete.
While you cannot claim the interest paid during the construction period immediately, the Income Tax Act allows you to claim it in five equal installments after the construction is completed. This is known as pre-construction interest.
Example: If you paid ₹5 lakhs as interest during the construction phase, you can claim ₹1 lakh annually for the next five years, in addition to the regular interest deduction under Section 24(b).
Key Takeaway: Pre-construction interest can be claimed in five equal installments starting from the financial year in which the construction is completed.
Under Section 80C of the Income Tax Act, you can claim a deduction of up to ₹1.5 lakhs on the principal repayment of the home loan. This deduction applies to the total amount paid towards the principal during the financial year.
Important: Similar to the interest deduction, the principal repayment deduction under Section 80C is only available after the construction is complete.
In addition to the principal repayment, Section 80C also allows you to claim a deduction on the stamp duty and registration charges paid at the time of property purchase. This deduction is available up to the maximum limit of ₹1.5 lakhs.
Note: The deduction for stamp duty and registration charges can only be claimed in the year in which these expenses are incurred.
If you are a first-time homebuyer, you may be eligible for an additional deduction under Section 80EEA of the Income Tax Act. This section allows an additional deduction of up to ₹1.5 lakhs on the interest paid on home loans for affordable housing.
Eligibility Criteria for Section 80 EEA:
The loan must be sanctioned between 1st April 2019 and 31st March 2022.
The stamp duty value of the property should not exceed ₹45 lakhs.
The taxpayer should not own any other residential property at the time of loan sanction.
Key Takeaway: First-time homebuyers can claim an additional deduction of up to ₹1.5 lakhs under Section 80 EEA, over and above the ₹2 lakhs under Section 24(b).
As mentioned earlier, most tax benefits, including interest and principal repayment deductions, are only available after the construction of the property is complete. Therefore, it’s essential to consider the construction timeline before claiming any tax benefits.
Important: If the construction is not completed within five years from the end of the financial year in which the loan was taken, the maximum deduction for interest under Section 24(b) reduces from ₹2 lakhs to ₹30,000 per annum.
The tax benefits differ depending on whether the property is self-occupied or let-out (rented). For a self-occupied property, the maximum deduction for interest is ₹2 lakhs. However, for a let-out property, there is no upper limit on the interest deduction, but the loss from house property (after adjusting the rental income) can be set off against other income only up to ₹2 lakhs.
Example: If the interest paid on a let-out property is ₹3 lakhs and the rental income is ₹1 lakh, you can set off ₹2 lakhs against other income in the same financial year, and the remaining ₹1 lakh can be carried forward to future years.
Ownership
If the property is purchased jointly, both co-owners can claim tax deductions individually, provided they are both co-borrowers in the home loan. This can effectively double the tax benefits.
Example: If a couple jointly purchases an under-construction property and both are earning, each can claim a deduction of up to ₹2 lakhs on interest paid (under Section 24(b)) and ₹1.5 lakhs on principal repayment (under Section 80C), thus maximizing their tax savings.
Delays in possession can impact the tax benefits. If the property is not completed within the stipulated time (five years from the end of the financial year in which the loan was taken), the deduction on interest paid reduces significantly from ₹2 lakhs to ₹30,000.
| Tax Benefit | Section | Details |
|---|---|---|
| Interest on Home Loan | Section 24(b) | Deduction up to ₹2 lakhs after construction completion. Pre-construction interest can be claimed in five equal installments post-construction. |
| Principal Repayment | Section 80C | Deduction up to ₹1.5 lakhs on principal repayment, available after construction is completed. |
| Stamp Duty & Registration Charges | Section 80C | Deduction within the overall limit of ₹1.5 lakhs, available only in the year of expense. |
| Additional Interest Deduction | Section 80 EEA | Additional deduction of ₹1.5 lakhs for first-time homebuyers under affordable housing, over and above Section 24(b). |
| Self-Occupied vs. Let-Out Property | Section 24(b) | Self-occupied: Deduction up to ₹2 lakhs. Let-out: No upper limit on interest deduction, but loss can be set off against other income only up to ₹2 lakhs. |
| Pre-Construction Interest | Section 24(b) | Pre-construction interest can be claimed in five equal installments starting from the financial year in which the construction is completed. |
| Completion Timeline | Section 24(b) | If construction is not completed within five years, the interest deduction reduces from ₹2 lakhs to ₹30,000. |
Buying an under-construction property can be financially beneficial, but you need to understand the tax rules to save money. There are ways to reduce your taxes, such as deductions for interest and principal payments, and special benefits for first-time homebuyers.
Remember: Keep track of how the construction is progressing, make sure you get possession on time, and keep all your documents. This will help you take full advantage of the tax benefits.
If the construction is delayed beyond five years, the interest deduction under Section 24(b) reduces from ₹2 lakhs to ₹30,000. It’s important to ensure that the builder adheres to the agreed timeline.
Pre-construction interest is the interest paid during the construction period. You can claim it in five equal installments starting from the financial year in which the construction is completed.
Yes, under Section 80C, you can claim a deduction on stamp duty and registration charges within the overall limit of ₹1.5 lakhs. However, this can only be claimed in the year in which these expenses are incurred.
First-time homebuyers of affordable housing can claim an additional deduction of ₹1.5 lakhs on interest paid under Section 80 EEA, over and above the ₹2 lakhs under Section 24(b).
Yes, for self-occupied properties, the interest deduction is capped at ₹2 lakhs. For let-out properties, there is no upper limit on the interest deduction, but the loss from house property can be set off against other income only up to ₹2 lakhs.
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