A complete guide on income tax benefits for under construction and ready to move properties

Buying your dream abode is arguably the biggest dream if one’s an average person’s life. It’s mostly your first big investment as a huge chunk of money is infused to bring this dream into reality. Home loans come across as a huge financial aid to support such dreams. It gives you the necessary backing that may not be possible with your savings alone. While it’s debt, after all, there are certain perks to home loans as well. For example, if you’re planning to book a home that is still under construction, it may bring some good news as far as tax deductions are concerned. The Income Tax department allows you to claim certain benefits if you book for a housing loan against an under-construction property. Let’s dive into the details.

Tax perks on under-constructed homes?

“Interest paid on loan taken for an under-construction house property shall be bifurcated into pre-construction and post-construction interest. Wherein post-construction interest is allowed in the year in which it is paid, the pre-construction interest is allowed in five equal installments beginning from the year in which the property is constructed or acquired, the total being restricted to Rs 2 lakhs,” said Shailesh Kumar, Partner, Nangia & Co LLP.

In a way, the deduction for interest on the under-construction property is deferred till possession of such property. Further, a deduction with respect to principal repayment is separately allowed under section 80C when paid. Moreover, for claiming a deduction for pre-construction interest, the construction should be completed within 5 years from taking the loan.

“Home loan borrowers can avail deduction on the interest component only after the completion of the construction of the property. The total interest component paid during the pre-construction period can be claimed for Section 24b deduction in five equal instalments, starting from the financial year in which the construction was completed. However, the total interest component, including for the post- and pre-construction period, claimed under Section 24b cannot exceed Rs 2 lakh in a financial year,” explained Ratan Chaudhary – head of home loans at Paisabazaar.com

Under Section 80EEA, the stamp duty value of the property should be up to Rs 45 lakhs, and the loan sanction date should be between 1 April, 2019 to 31 March, 2022. This deduction is in addition to the deduction of Rs 2 lakh for interest payments under Section 24 of the Income Tax Act.

Hence, borrowers who are not eligible for claiming interest rate deductions under Section 80EEA and have an interest component of over Rs 2 lakh in a financial year, would not be able to avail of the entire interest component repaid as deduction under Section 24b.

“Interest paid during the pre-construction period can bring additional tax benefit for a taxpayer, only if yearly post-construction interest for the post-construction period is not sufficient to claim the maximum loss of Rs 2 lakhs under the head house property. If per annum interest of post-construction period itself is sufficient enough to claim the maximum permissible loss of Rs 2 lakhs, then the interest paid for pre-construction period will not yield any tax benefit,” Kumar pointed.

Additionally, Kumar said that deduction for interest on the loan is also allowed under various sections depending upon the fulfillment of the respective provisions and depending upon whether the property is used as self-occupied or is rented out.

The Income-Tax Act also provides a deduction of principal on home loans under Section 80C which is restricted upto a limit of Rs 1,50,000 clubbed with other deductions like life insurance policy, tuition fees, provident fund etc.

Is a joint home loan better?

Co-owned properties are assessable as individual properties in the hands of each co-owner for their respective share in the property. Thus, the deduction benefits under the Act shall separately be available to each co-owner.

“The threshold limit of Rs 1,50,000 for principal repayment and limit of Rs 2,00,000 for claiming loss under the head house property shall apply individually to each co-owner. Accordingly, the aggregate amount of deductions towards the property may be higher as compared to when the loan is taken in individual name,” Kumar asserted.

Can two homes be claimed ‘self occupied’? 

With effect from AY 2020-21, two properties can be claimed as self-occupied i.e. no notional rent shall be levied on these two properties.

“This benefit shall be available only when the property is occupied by the owner for his residence or is not occupied by the owner for the reason of employment or business at any other place. Earlier this benefit was available for one house property and the second house property, even if vacant or self-occupied was considered to be deemed let out and taxpayers were supposed to pay rent on notional rent of such second house property,” Kumar exclaimed.

Ways to adjust capital loss?

Selling off your home may incur some loss at some point or the other. But there are options to adjust this loss smartly.

“The loss incurred on selling a house property would be considered as a capital loss. If the loss is incurred within 2 years of property purchase, then it would be considered as a short-term capital loss. If the loss is incurred after 2 years of property purchase, then it is considered as a long-term capital loss,” Chaudhary exclaimed.

He further said that short-term capital loss can be adjusted against long term capital gains whereas the long term capital loss can only be adjusted against long-term capital gains. In case there is not enough capital gains to adjust the loss, then the unadjusted loss can be carried forward to up to 8 years from the sale of the house property.