Can I Claim Tax Benefit on Home Loan Before Possession?

The Government of India has always tried its best to promote homeownership. One of the ways it does so is through Home Loan tax exemptions. Those who avail a Home Loan to fund real estate purchase can claim tax benefits. Most homebuyers, these days, purchase ready-to-move-in flats and homes. However, there are many advantages associated with investing in a property that is still being constructed, the most important being affordable property prices and therefore, better return on investment in the long run. Most borrowers, however, do not have any clarity on Home Loan tax benefits available to borrowers who have invested in under-construction properties.

Can an Individual Claim Home Loan Tax Benefit Before Possession?

Yes, it is possible to claim Home Loan tax benefits before possession. However, these tax rebates are only applicable to payments made toward principal repayment. Suppose you took a Home Loan to buy an under-construction property and your EMIs have already begun even though the property is still in the under-construction phase. In this case, Home Loan borrowers can claim tax rebates up to a maximum of Rs.1.5 Lakh on payments made towards principal repayment under Section 80C of the Income Tax Act. However, when it comes to payments made towards interest repayment, one cannot claim a Home Loan tax exemption during the pre-construction phase. Let us now understand how tax exemptions on the interest component of a Home Loan work in the case of under-construction properties.

What Does Section 24(b) Say Regarding How to Claim Pre-Construction Interest?

Pre-construction interest is the interest that one pays while the residential house is still under construction. Deduction on Home Loan interest cannot be claimed when the house is under construction and can be claimed only after the construction is finished.

In the case of pre-construction properties, EMIs usually begin post possession. However, one must pay interest on the Home Loan amount disbursed during the construction phase. The interest paid during the pre-construction phase is called pre-EMI interest and one can claim tax benefits on the pre-EMI interest in five equal instalments after the construction is complete.

What Should One Do in Case the Possession Gets Delayed?

When this happens, borrowers may lose out on Home Loan tax benefits. Keeping this in mind, the Government of India has brought about changes in Section 24(b) of the Income Tax Act. Under this act, borrowers can claim tax benefits up to a maximum of Rs.2 Lakh under Section 24(b) of the Income Tax Act even if the borrower delays the handover of the property by another two years.

What if the Borrower Delays Possession by More than 5 Years?

In this case, the Home Loan borrower is at loss as they can end up losing 85% of the tax benefits they are eligible for.

Can 80EEA Be Claimed Before Possession?

One can claim deduction under section 80EEA of the Income Tax Act even if they have not received possession of the property. Borrowers must know the difference between 80EEA and Section 24(b) of the Income Tax Act. Under Section 80EEA of the Income Tax Act, one can claim deductions up to a maximum of Rs.1.5 Lakh. However, under Section 24(b) of the Income Tax Act, one can claim deductions up to a maximum of Rs.2 Lakh. Further, under Section 80EEA, one can claim tax deduction only on a Home Loan availed from a bank or financial institution. However, under Section 24, one can claim tax deduction even if one has borrowed money from friends or family to buy real estate.

While we are on this topic, let us answer one last question that borrowers ask on this topic: is it necessary to have a possession certificate to claim tax benefit? Yes, one cannot claim Home Loan tax benefits without a possession certificate. So, make sure to have this document with you when applying for a Home Loan.

Also Read: Section 80EE – Deduction for Interest Paid on Home Loan

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