People are increasingly preferring to acquire under-construction property as the guidance cost increases once it is fully constructed. In general, you can deduct up to ₹ 2 lakh in home loan interest and ₹ 1.5 lakh in principal repayment from your income tax. However, even if you’ve begun paying your EMI, you won’t be able to take advantage of these tax benefits if the property is still under construction. This is where the issue originates. The majority of the time, the property is handed over to the borrower a year or two after the loan is taken out. This could occur as a result of the building being incomplete. Section 24 of the Income Tax Act makes it plain that no tax benefits can be obtained if the construction is not complete.
The period from the date of house loan application to the end of the financial year immediately preceding the year of property acquisition is known as the prior period. It is also known as the under-construction period. For instance, suppose you get a home loan on October 1, 2014, and you close on the house on October 1, 2015. On March 31, 2015, the financial year before the acquisition year comes to a close. As a result, your previous time frame is from October 1, 2014 to March 31, 2015.
Prior period interest is the interest you owe from a previous period. The legislation permits you to claim a deduction for interest paid in five equal payments during the building term.
If Mr. Harsh took a home loan on May 01, 2015, while his property was still under construction and he acquired the flat on July 1, 2019, the interest he paid on his home loan is as follows:
|Financial Year||Interest Paid (in ₹)|
Step 1: The prior period was calculated according to the details given below.
Step 2: Determine the amount of interest that can be deducted for a property that is still under development.
Total preceding period interest is calculated as follows:
Interest for the 2015-16 fiscal year was ₹ 1,80,000 +
Interest for the 2016-17 fiscal year was ₹ 1,50,000 +
Interest for the 2017-18 fiscal year was ₹ 1,20,000 +
Interest for the 2018-19 fiscal year was ₹ 1,00,000
= Total Interest was ₹ 5,50,000.
We divide the money into five equal parts and claim this deduction every year because you can get interest in five equal installments from the year of purchase. Mr. Harsh will be permitted a yearly interest deduction of ₹ 5,50,000/5 = ₹ 1,10,000
Points to keep in mind as you calculate your deduction:
1. Keep in mind that the deduction only applies to interest paid prior to the start of construction. The main component repaid during the pre-construction period is not eligible for a deduction.
2. If the date of the house loan is the same as the date of the property acquisition, you can take advantage of tax benefits under section 24 rather than the provision for under-construction property.
3. There is a difference between pre-EMI interest and pre-construction interest. Pre-EMI interest is the interest you pay on an under-construction property under Construction Linked Plan, whereas pre-construction interest is the interest you pay in the previous time.
Under-construction properties are more often than not much more affordable compared to the rates when they are built as they have low guidance rates. However, once you select a property you like, before you invest any money in it, ensure that the buyer is legitimate. You should thoroughly check their background and only then buy the property. There are several times when problems might arise that could hold up the construction of your property. The issue could also turn out to be regarding the law. The loan still needs to be paid off even in the event of such delays or if the construction stops entirely. If there is a hold-up in the acquisition of your property, there will be a hindrance in the benefits you get on your tax as well.
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