Can I Claim Home Loan Tax Benefits on an Under-Construction Property?

Real estate prices have increased multi-fold during the last few years. The revival of the real estate sector post COVID has led to homes becoming almost unaffordable for the general middle-class. The only way for a majority of people to afford a home these days is to opt for a Home Loan. Home Loans allow borrowers to buy their dream home, an emotional and financial asset, and pay for it in a systematic, hassle-free, and stress-free manner. Home loans are the cheapest of all loans – lenders sanction them at highly affordable interest rates. Further, they can be repaid over a period extending up to 30 years, which makes repayment easy and less burdensome.  

If you are planning to avail of a Home Loan to fund your real estate investment/purchase, you should consider investing in an under-construction property instead of a ready-to-move-in property. To start with, under-construction properties are cheaper. Second, if you invest in such a property, you will be able to claim Home Loan tax benefits on under-construction property. In this article, we elaborate on these tax benefits based on various sections of the IT Act 1961, including the capped amount and applicable conditions. So, read on. 

Home Loan Tax Benefits on Under-Construction Property 

Some Home Loan borrowers think that they can claim tax exemptions only if they invest in a ready-to-move-in home or flat. This is not the case – under-construction properties are also eligible for several Home Loan tax benefits. Let us look at these benefits.

Home Loan Tax Benefit Under Section 24B

The Section 24B of the Income Tax Act deals with the Home Loan tax benefits that one can claim on the payments made towards the repayment of the interest component of a Home Loan. In case of a Home Loan availed of to buy a ready-to-move-in property, one can claim tax exemption up to a maximum of Rs.2 Lakh per year under this section of the Income Tax Act.

In the case of under-construction properties, one can claim tax exemption on the payments made towards interest repayment while the construction was on after the construction is complete. One can claim this tax exemption in five equal instalments after the completion of the construction of the property. Once the construction is complete and you are still repaying your Home Loan, you can tax exemption on payments you are making towards interest repayment as well as the payments you made towards interest repayment when the construction was still going on. However, the total Home Loan tax benefit under section 24B cannot exceed Rs.2 Lakh.

Also Read: How Much Tax Can be Saved Under Sections 80C, 80D, and 80G 

Home Loan Tax Benefits on Under-Construction Properties Under Section 80EEA

As mentioned before, under Section 24 of the Income Tax Act, borrowers can claim tax exemption on interest paid during the construction phase after the completion of construction. Fortunately, in some cases, borrowers can also claim deductions on payments made towards interest repayment during the pre-construction phase itself.

Section 80EEA states that borrowers can claim tax exemption up to a maximum of Rs.1.5 Lakh on payments made towards the interest component repayment of their loan during the pre-construction phase itself if they meet the following criteria:

The borrower must have availed of your house loan between April 1, 2019 and March 31,2022. The borrower must not have any other property in their name. The stamp value of the property should not be more than Rs.45 Lakh. If you meet the following criteria, you can claim income tax benefit on Home Loan even during the pre-possession phase.

Home Loan Tax Exemptions Under Section 80C of the Income Tax Act

Under Section 80C of the Income Tax Act, a borrower can claim tax exemption on the payments made towards stamp duty and registration charges. However, once again, one can claim these deductions only after the construction of the property is complete.

Further, under section 80EEA of the Income Tax Act, if the stamp duty of the property purchased by the borrower does not exceed Rs.45 Lakh, the borrower automatically becomes eligible for tax exemption up to Rs.1.5 Lakh on payments made towards interest repayment.

Also Read: Income Tax Deduction under Section 80 EE 

Key Considerations while Availing of an Under-Construction Property Home Loan

Now that we know the tax benefits available on under-construction properties, let us look at the things that borrowers must keep in mind while availing of a housing loan for an under-construction property.  

• To start with, it does not matter whether you are availing of a loan for an under-construction property or a ready-to-move-in flat or home, ensure that you know about the interest rates offered by various lenders. Once you have all the required details regarding the interest rate, use a Home Loan EMI Calculator to compare offers and in the end, choose the most lucrative deal.    

• Borrowers are often advised to keep their loan tenor as short as possible. People give this advice to help borrowers save on the interest pay-out and reduce the total cost of borrowing the loan. While this is sound advice, it is not one that always works. If your income does not allow you to afford high EMIs, it is always better to opt for a long tenor and keep your EMIs affordable.  

• Borrowers must check their credit score at least six months before applying for a Home Loan. Lenders require borrowers to have a credit score of 750 or above to be eligible for a Home Loan. If your credit score is below 750, your loan application may get rejected. This, in turn, will have a more negative impact on your credit rating. So, borrowers must check their credit score at least six months before beginning the loan application process. This way, if their credit score is not up to the mark, they will have ample time to take corrective measures.  

Final Words

Home Loan borrowers often very wrongly assume that income tax benefits on Home Loans are only available for ready-to-move-in properties. Through this article, we have tried to explain that this is not the case. If you are planning to invest in the real-estate sector, consider investing in an under-construction property. This way, you will save money, get better returns on your investment and will also be able to claim tax exemptions on your Home Loan.

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