A Complete Guide to Home Loan Tax Benefits on Under-Construction Properties

Buying an under-construction property with a home loan can be a smart financial decision, but it comes with specific tax considerations that every homebuyer needs to understand. Unlike ready-to-move-in properties, the tax benefits associated with under-construction homes differ significantly under Indian tax laws.

Homebuyers can avail of deductions on principal repayment under Section 80C and interest under Section 24(b). However, these tax benefits apply only after the possession of the property.

In addition to these standard deductions, it's important to explore pre-EMI interest deductions and GST implications. Understanding how to utilise these provisions effectively can help maximise tax savings and make the most out of your home loan for an under-construction property. This article breaks down the tax advantages linked with home loans for under-construction properties in India and provides tips on optimising your tax benefits.

Tax Benefits on Home Loans for Under-Construction Properties

Tax benefits on home loans for under-construction properties are distinct from those available for completed properties. While borrowers can avail themselves of deductions on both principal repayment and interest paid, these benefits are subject to specific conditions and timelines. Understanding the nuances of these deductions is crucial for maximizing your tax savings. Here’s a comprehensive breakdown of the tax advantages associated with home loans for under-construction properties.

Tax Benefits on Interest Paid Under Section 24(b) of the Income Tax Act

Under Section 24(b) of the Income Tax Act, home loan borrowers can claim a tax deduction on interest paid up to Rs 2 lakh per year for a self-occupied property. However, this deduction is applicable only after the construction of the property is completed. During the construction phase, interest paid on the loan (known as pre-construction interest) cannot be claimed immediately. Instead, it can be deducted in five equal installments starting from the year in which possession is taken.

It's important to keep in mind that if the construction is not completed within five years from the end of the financial year in which the loan was taken, the maximum interest deduction is reduced to Rs 30,000 per year, rather than the full Rs 2 lakh.

Tax Benefits on Principal Repayment Under Section 80C of the Income Tax Act

Under Section 80C of the Income Tax Act, home loan borrowers can avail a tax deduction on principal repayment of up to Rs 1.5 lakh per year. However, this benefit is available only after the possession of the property is taken. Principal payments made during the construction period do not qualify for tax deductions.

Additionally, to retain the tax benefit under Section 80C, the property must not be sold within five years of possession. If the property is sold before this period, any deductions claimed on the principal repayment will be added back to the taxable income in the year of sale.

Understanding these nuances of principal repayment deductions can help homebuyers maximise their tax savings when financing an under-construction property with a home loan.

 

 

Pre-EMI Interest Deduction for Under-Construction Property

When taking a home loan for an under-construction property, borrowers typically make pre-EMI payments, which consist solely of the interest component until the property is completed. Unlike a regular EMI, which includes both principal and interest, pre-EMI payments do not contribute to loan repayment but serve as a temporary financial commitment during the construction phase.

The pre-EMI interest paid before possession is not immediately eligible for tax deductions. However, under Section 24(b) of the Income Tax Act, borrowers can claim the pre-EMI interest paid during the construction period in five equal annual installments starting from the year the construction is completed and possession is taken.

This provision helps homebuyers maximise their tax benefits on home loans for under-construction properties, ensuring that interest payments are accounted for once the property is ready for possession.

Conditions for Claiming Tax Benefits on Home Loan for an Under-Construction Property

To avail tax benefits on a home loan for an under-construction property, borrowers must fulfill certain conditions set by the Income Tax Act. Failure to meet these requirements may lead to the loss of valuable deductions.

1. Completion of Construction within Five Years: Tax benefits on home loan interest deductions under Section 24(b) are available only if the construction is completed within five years from the end of the financial year in which the loan was sanctioned. If the property’s completion is delayed, the maximum interest deduction is capped at Rs 30,000 per year instead of the full Rs 2 lakh.
   
   

2. Possession of the Property: Deductions on both principal repayment (under Section 80C) and interest (under Section 24(b)) can only be claimed after taking possession of the property. No tax benefits are available during the construction phase, except for the deferred pre-EMI interest deduction, which can be claimed in five equal installments post-possession.
   
   

3. Property Should Not Be Sold within Five Years: Under Section 80C, if the property is sold within five years from the date of possession, all tax benefits claimed on the principal repayment will be reversed, and the deductions previously claimed will be added back to the taxable income in the year of sale.
   
   

4. Loan Must Be Taken from an Approved Lender: To claim tax benefits, the home loan must be taken from a recognised financial institution, such as a bank, housing finance company (HFC), or an approved NBFC. Loans from friends, family, or unregistered lenders do not qualify for tax deductions.
   
   

5. Borrower Must Be the Legal Owner: Only the legal owner(s) of the property are eligible for tax benefits. In the case of a joint home loan, both co-borrowers can claim deductions separately, provided they are also co-owners of the property.

Tax Benefits on Home Loans: Under-Construction vs. Ready-to-Move Properties

The tax treatment of home loans differs significantly between under-construction and ready-to-move properties, and understanding these differences is key to making informed financial decisions. Here's a breakdown of the key factors to consider:

1. Interest Deduction (Section 24(b))
   For under-construction properties, the interest paid during the construction period cannot be claimed immediately. However, after possession, borrowers can claim this interest in five equal installments, subject to a Rs 2 lakh annual cap, provided the construction is completed within five years. In contrast, for ready-to-move properties, borrowers can claim the full interest deduction of up to Rs 2 lakh per year from the year of purchase, with no time limit on construction.
   
   

2. Principal Deduction (Section 80C)
   For under-construction properties, principal repayment deductions under Section 80C are available only after possession. These deductions can be claimed up to Rs 1.5 lakh per year. However, for ready-to-move properties, principal repayments are eligible for deductions from the year of purchase, with the same annual limit of Rs 1.5 lakh.
   
   

3. Pre-EMI Interest
   With an under-construction property, borrowers pay pre-EMI interest during the construction period, which can only be claimed in five annual installments after possession, subject to the overall Rs 2 lakh cap on interest deductions. For a ready-to-move property, there is no pre-EMI interest since EMIs start immediately, allowing borrowers to claim the full interest deduction from the start.
   
   

4. Possession Timeline & Risk
   The under-construction property comes with the risk of construction delays, which can affect eligibility for tax benefits. If the property is not completed within five years of taking the loan, the maximum interest deduction is capped at Rs 30,000 per year instead of the usual Rs 2 lakh. On the other hand, ready-to-move properties carry no risk of delay, and tax benefits are available immediately upon purchase.
   
   

5. GST Applicability
   Under-construction properties attract 5% GST (or 1% for affordable housing), which increases the overall cost of the property. In contrast, ready-to-move properties are exempt from GST, making them relatively more cost-effective.
   
   

6. Rental Potential
   An under-construction property cannot be rented out until possession, which could lead to a financial burden if construction is delayed. In comparison, a ready-to-move property can be rented out immediately, providing a potential rental income stream from the very beginning.
   
   

7. Property Price & Appreciation
   Under-construction properties are generally available at lower prices, offering potential appreciation in value by the time the property is completed. On the other hand, ready-to-move properties are typically more expensive, but they offer immediate usability, instant tax benefits, and eliminate the risk of project delays.
   
   

Claiming Home Loan Tax Benefits on Under-Construction Property: Key Mistakes to Avoid

Buying an under-construction property using a home loan can offer significant income tax benefits under Sections 80C and 24(b) of the Income Tax Act. However, many homebuyers unknowingly make mistakes that reduce or delay their eligible deductions. To help you maximize your savings, here are the most common errors to avoid when claiming home loan tax benefits on under-construction properties:

1. Not Tracking Pre-EMI Interest Payments

One of the most overlooked areas is pre-EMI interest, which is the interest paid during the construction phase before possession. As per Section 24(b), this amount is eligible for deduction in five equal installments starting from the financial year in which the property is handed over. Failing to maintain a proper record or collect loan interest certificates from your lender can lead to a loss of this benefit. Always keep a track of your loan statements and request a breakup of pre-EMI interest from your bank or housing finance company.

2. Claiming Tax Deductions Before Possession

A major misconception is that tax benefits on home loans start as soon as the loan disbursement begins. In reality, tax deductions on home loan interest and principal repayment can only be claimed after possession of the property. Any claims made prematurely can be rejected during income tax return filing or may lead to notices from the Income Tax Department.

3. Ignoring the Five-Year Construction Deadline

Under Section 24(b), to claim the full interest deduction of up to Rs 2 lakh per annum, the construction of the property must be completed within five years from the end of the financial year in which the loan was availed. If this timeline is not met, the deduction limit drops drastically to Rs 30,000 per year, significantly affecting your tax savings. Always check the developer’s track record and construction timeline before investing.

4. Overlooking GST on Under-Construction Properties

Many buyers forget to factor in the impact of Goods and Services Tax (GST) while purchasing under-construction homes. A 5% GST rate (or 1% for affordable housing) is levied on the property value, increasing the total cost. Unlike ready-to-move properties, which are exempt from GST, this additional tax can impact your home loan eligibility and overall financial planning.

5. Missing Out on Principal Repayment Deductions

Under Section 80C, you can claim a deduction of up to Rs 1.5 lakh per year on the principal portion of your EMI – but only after taking possession of the property. Some buyers miss claiming this deduction due to oversight or lack of awareness. Ensure your home loan repayment certificate is submitted with your ITR to avail the benefit.

6. Selling the Property Within Five Years

If you sell the property within five years of taking possession, all tax deductions previously claimed on the principal repayment under Section 80C will be reversed. The total amount will be added back to your taxable income in the year of sale, increasing your tax liability. To retain your tax benefits, avoid selling the property too soon.

7. Not Collecting Proper Documentation

To successfully claim home loan tax deductions, it is essential to have complete and valid documentation. This includes:

• Loan sanction letter
  
  

• EMI payment receipts
  
  

• Possession certificate
  
  

• Interest and principal repayment certificates from your lender
  
  

Without these, your claims may not be accepted by the Income Tax Department.

Final Thoughts

Navigating the tax landscape around home loans for under-construction properties may seem complex, but with the right information, it can lead to substantial financial benefits. Understanding when tax deductions apply, staying aware of key timelines like the five-year construction clause, and keeping track of your documentation are all essential steps in making the most of your home loan.

Whether you're a first-time buyer or a seasoned investor, careful planning—especially in relation to possession and tax eligibility—will help you make smarter, more tax-efficient decisions. At Urbanage, we encourage you to stay informed and consult with experts to ensure your investment is both financially sound and tax-advantageous.

By avoiding common mistakes and knowing the differences between under-construction and ready-to-move properties, you can make well-informed choices that maximize your home loan benefits. Always work with trusted advisors to stay updated on the latest regulations. With the right approach, your home loan journey can lead not only to your dream home but also significant savings on your taxes.