Sav­ing tax on under-con­struc­tion projects

If you plan to take a loan to buy an apart­ment that is still under con­struc­tion, here is what you should keep in mind

HT Estates - - HTESTATES - Preeti Sharma

Buy­ing prop­erty is not an easy t ask, 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 con- struc­tion 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.


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