If you plan to take a loan to buy an apartment that is still under construction, here is what you should keep in mind, Buying property is not an easy task, especially with property prices remaining sky-high and interest rates yet to ease significantly. Many prospective buyers are, however, being tempted to check out under-construction properties. Not that buying an under-construction property is easier – there are complications and intricacies involved in borrowing funds, raising capital and delays in completion of construction. The relatively cheaper price tag of such properties, however, is what makes them more attractive.
If you intend to buy an underconstruction property with borrowed capital, do not go by the general impression that the costs involved in the process - processing fee, interest during construction, registration fee are sunk costs and there is no immediate tax relief for such expenses. There’s another side to the story to explore.
Interest paid/ payable on loan before the completion of construction of the property will be aggregated and allowed as deduction in five equal installments for five successive financial years (FY) starting with the year in which the construction is completed. Any interest paid on loan taken for any purpose other than for acquisition or construction of the property, that is, for repair, renewal or reconstruction, is not eligible for deduction.
In case the house property is self-occupied (not rented out), the deduction is limited to ` 2 lakh for each FY. Please note that the interest on housing loan paid during the relevant year (in addition to pre-construction period interest) is also included in the overall limit of ` 2 lakh. Make sure that you complete the construction within a period of three years in order to maximise this tax incentive. In case the construction on such self-occupied property is not completed within three years from the end of the FY in which the loan is borrowed, the deduction shall be limited to ` 30,000 for each FY.
Eligible deduction for interest on loan on self-occupied house property is ` 30,000 if construction is not completed within three years, and ` 2 lakh if construction is completed within three years.
Let’s understand this with an example: Megha took a house loan in April 2012 from a bank for the purpose of construction of house property. The construction was completed in June 2014. Megha had paid a total interest on the borrowed capital (ie on the outstanding loan amount) of around ` 4 lakh which is during the FY 2012-13 and FY 2013-14. Megha can claim a deduction in respect of this interest of ` 4 lakh (over and above the yearly interest paid) in five equal installments of ` 80,000 (ie`4 lakh/5) each starting from the financial year 2014-15.
In case you are planning to let out your property, the overall limit of ` 2 lakh is not applicable and the entire amount of eligible interest is deductible.
An important factor to bear in mind is that pre-construction interest should not be confused with the concept of bank pre-EMI interest. The term pre-EMI interest mentioned in loan statements of banks may not necessarily have the same meaning as preconstruction interest. Pre-EMI interest means interest due up to the start of payment of the first installment. In short, it is levied by a bank for the period between date of disbursement of loan and start of the first EMI. That is, if in the above example, the bank has disbursed the loan in April 2012 but the EMI starts from July, 2012, then such interest from April 2012 to July 2012 will be treated as pre-EMI interest. Hence, the terms pre-construction interest and pre-EMI interest are not inter-changeable and should not be confused.
For those who have taken the leap and have already purchased their first house last year, Section 80EE of the IT Act brings in additional benefits. In case the loan is sanctioned between March 1, 2013 and March 31, 2014, and the loan does not exceed ` 25 lakh and the price of the property bought does not exceed
` 40 lakh, an additional deduction of ` 1 lakh can be availed, spread over two FYs, ie FY 201314 and 2014-15. This deduction under Section 80EE of the Act is an additional deduction only available until the financial year 2014-15.
To add to the benefits, there is tax deduction available on account of principal repayment of home loans within the overall limit of ` 1.5 lakh per annum of Section 80C of the IT Act. This section also allows tax deduction for the amount paid towards stamp duty and the registration process in the year of purchase of the property.
Though there are certain costs in purchase of property for which tax benefits may not be available, at least the interest for pre-construction is not a sunk cost. This aspect should also be considered while deciding to acquire a property.