Under construction House How to Claim Tax Deduction on Home Loan Interest Payments (2)

<strong>Under</strong>-<strong>construction</strong> <strong>House</strong>: <strong>How</strong> <strong>to</strong>
<strong>Claim</strong> <strong>Tax</strong> <strong>Deduction</strong> on Home Loan
Interest Payments
Most of us know that a home loan borrower can enjoy tax benefits on the principal
and interest amount that is paid <strong>to</strong>wards loan. But not everyone is aware of the
advantage available <strong>to</strong> those who have taken home loan for <strong>construction</strong> purpose.
Yes, even if your property is still under <strong>construction</strong>, you can still enjoy the benefits
of Indian tax deductions by smart moves. This content will help you in understanding
how <strong>to</strong> be smart and save some money from being taxed when you have a home
loan taken for house that is still under <strong>construction</strong>.
If you have a home loan for an under <strong>construction</strong> property then it is possible <strong>to</strong> get
tax deductions up <strong>to</strong> Rs. 2 Lakhs on the interest payments made in a year and up <strong>to</strong>

1.5 Lakhs <strong>to</strong>wards any principal payments made under Section 80C of the Income <strong>Tax</strong>
Act. <strong>How</strong>ever, it is important <strong>to</strong> keep in mind that this tax benefit is not available if
the home loan payments are during pre-<strong>construction</strong> phase. There are certain types
of property purchase wherein the buyer does not have <strong>to</strong> pay a penny <strong>to</strong>wards loan
repayment EMI. In such cases this tax deductions are not applicable.
1. Any property that is still under <strong>construction</strong> will not attract any type of tax for the
interest paid on EMI- Section 24 of IT Act
2. Right from the year the <strong>construction</strong> is complete deduction can be enjoyed up <strong>to</strong> 5
installments on pre-<strong>construction</strong> period interest
3. Until <strong>construction</strong> is complete or acquisition is made, the period is called as “Prior
Period”
4. Period between when the money was borrowed up <strong>to</strong> <strong>construction</strong> of the house is
called as “Pre-<strong>construction</strong>” period
5. Until possession of the house, the borrower will have <strong>to</strong> just pay interest on the
loan amount borrowed <strong>to</strong> the lender, this is called as “PPI- Prior Period interest”
6. If the home loan amount is utilized by the borrower for renewal, repairs or re<strong>construction</strong>,
then tax deduction benefits cannot be enjoyed
7. If you repay the principal during pre-<strong>construction</strong> period <strong>to</strong> lender, then this is not
eligible for tax deductions
8. <strong>Tax</strong> deduction benefit is not available on loan taken for buying a plot or land
All tax deductions under Section 80C of the IT Act is only if the payment is made
irrespective of for which year it is made. Any amount paid <strong>to</strong>wards registration fees
or stamp duty is also applicable for tax deductions under 80C even if the borrower
has not taken loan. To enjoy this benefit it is important that the borrower should
furnish house <strong>construction</strong> completion certificate.

Having said all these, it is important <strong>to</strong> be aware of the fact that the assessee who
enjoyed tax deductions is bound <strong>to</strong> repay the deduction amounts in case if he/ she
sell the property within 5 years from the end of Financial Year in which possession of
house has been obtained. The deductions will be reclaimed by the Indian
Government under Section 80C during the financial year when the house property
was sold. If the home loan taken is not for self-occupation purpose then whole
interest amount can be claimed as tax deductions under Section 24. There is no
maximum limit for claiming tax deductions for not self-occupied property.<strong>Tax</strong>
deductions under Section 24 are for interest on home loan and this is on accrual
basis. Thus all deductions have <strong>to</strong> be claimed under Section 24 the same year even if
no payment is made. It is also important that the <strong>construction</strong> of house should be
completed within 3 years of taking loan. <strong>Tax</strong> deduction on interest beyond this
period is not applicable.
<strong>Deduction</strong>s Allowed under Section 24 for Interest Payments made on Home Loans
Type of
Property
Self-Occupied Property
Not Self Occupied Property
Completion
Status
Completed
within 3 years
Not completed
within 3 years
Completed
within 3 years
Not completed
within 3 years
<strong>Deduction</strong>
Allowed
Rs. 1,50,000 Rs. 30,000 No Limit No Limit
Summary of <strong>Tax</strong> Benefits available on Home Loans in India under Section 24 and
Section 80C
Particulars Section 24 Section 80C
<strong>Tax</strong> <strong>Deduction</strong>
allowed for
Interest
Principal

Basis of <strong>Tax</strong>
<strong>Deduction</strong>
Accrual basis
Paid basis
Quantum of <strong>Tax</strong>
<strong>Deduction</strong> allowed
Self-Occupied Property: Rs. 2,00,000
Non- Self Occupied Property: No
Limit
Rs. 1,50,000
Purpose of Loan
Purchase/ Repair/ Renewal/
Construction/ Re<strong>construction</strong> of a
Residential <strong>House</strong> Property
Construction/ Purchase of a
new <strong>House</strong> Property
Eligibility for
claiming <strong>Tax</strong>
deduction
Purchase/ Construction should be
completed within 3 years
Nil
Restriction on Sale
of Property
Nil
<strong>Tax</strong> <strong>Deduction</strong> claimed
would be reversed if Property
sold within 5 years
Important Points <strong>to</strong> be Considered for Home Loan <strong>Tax</strong> <strong>Deduction</strong>s
As per Shew Kissan Bhatter v. CIT (1973) 89 ITR 61(SC), interest paid on the
outstanding amount is not tax deductible
<strong>Tax</strong> deduction can be availed only if the <strong>construction</strong> of the housing property is
completed within 3 years of taking home loan
Any commission paid <strong>to</strong>wards arranging a home loan is not eligible for tax
deductions
Money spent <strong>to</strong>wards registration of the housing property and stamp duty is
eligible for tax deductions

In case if the house property is not earning any income <strong>to</strong> the owner and thus the
interest of the home loan is a loss, then such loss can be adjusted against income
from various other heads within the same financial year
In case if the loss incurred cannot be set off against income from other heads of the
same financial year, such losses can be carried forward up<strong>to</strong> next 8 years financial
years.
Only the person who has constructed or acquired the property can enjoy tax
benefits. This benefit is allowed <strong>to</strong> its successor of the property.
Limit for Home Loan <strong>Tax</strong> Benefits in India
The below tax benefits are not for a property but for individual who is owning
house
In case the property is purchased joint, both the owners can enjoy the benefit
however, the limit <strong>to</strong>gether will remain the same
The percentage of benefit of tax deduction is usually calculated on the percentage
share of ownership/ EMI payment of the loan amount for joint ownership
Though you are staying in rented house and applying for HRA deductions, the
benefits of tax deductions for house property under <strong>construction</strong> can also be
enjoyed by the assesse
Quantum of <strong>Deduction</strong> (Rs.)
Particulars
Self-Occupied Property
Non-Self Occupied
Property
Section 24 2,00,000 No Limit

Section 80C 1,50,000 1,50,000
Section 80EE 50,000 50,000
In order claim these tax deductions it is important <strong>to</strong> share documents and
statements confirming the amount paid <strong>to</strong>ward interest and principal of the home
loan repayment amount, <strong>construction</strong> status of the house property should be
furnished. These will be considered with the taxable income of the individuals and
any eligible tax benefits will be deducted.
Though there is strict time-frame <strong>to</strong> complete house <strong>construction</strong>s, it is good <strong>to</strong> take
tax benefits on under <strong>construction</strong> house property. Any interest paid during the
financial year <strong>to</strong>wards interest of home loan will attract this tax deduction. In India
all home loans for under <strong>construction</strong> property is structured such a way that the
installed is released by the bank according <strong>to</strong> the <strong>construction</strong> stage of the property.
Regular and timely inspection will be conducted by the bank before releasing each
installment in order <strong>to</strong> ensure that home loan amount is being utilized for the
<strong>construction</strong> purpose only.
All the above said tax benefits are applicable only for residential property whether it
is an independent villa, gated community or even an apartment. It is important <strong>to</strong>
understand the strict timelines on home loan under <strong>construction</strong> tax benefits and act
accordingly <strong>to</strong> get benefited <strong>to</strong> the maximum extent from the home loan. It can
always work for your advantage if it is utilized in the right manner.

What happens if I sell the house property within 5 years of completing it
<strong>construction</strong> through home loan?
In such cases, tax implications will be attracted <strong>to</strong>wards home loan. All deductions
enjoyed through this featured will be reversed <strong>to</strong> your income tax calculations and a
lump sum amount will have <strong>to</strong> be paid. It will simple be your income of the particular
financial year which is taxable.On the other hand, if you decide <strong>to</strong> sell the property
<strong>to</strong> use the fund <strong>to</strong> invest in a self-constructed house, then it is possible <strong>to</strong> claim
exemptions on capital gains as long as the new property is completed within 3 years
of the sale of old house (asset).
Knowing the terms and conditions and how tax is calculated on house property
which are under <strong>construction</strong> will definitely help you <strong>to</strong> manage your tax and you will
also be able <strong>to</strong> enjoy lot of tax benefits. Knowing what can be availed and applying
for the same at the right time will help you in getting maximum tax benefits within a
financial year.