Many buyers prefer to opt for under-construction properties as the prices of such properties are lower than the prevailing market rates of ready-to-move-in properties. So it’s more affordable for them as they would need to take a smaller home loan to complete the purchase.
But there are few things to consider when taking a loan for under-construction property.
And very first thing is to understand home loan tax benefits and to figure out whether you get any income tax deductions/exemptions on a home loan during the construction phase of your under-construction property or not. Or as many people call it – income tax rebate on home loans for under-construction property.
No doubt this is a very important aspect when purchasing a house under construction. And given the delays in housing projects construction these days, it can have a big financial impact if you don’t know what you are getting into.
So without further adieu, let’s see how to claim a tax deduction on Home Loan Interest payments for Under Construction house. Or how to claim income tax exemption on loans taken for under-construction property.
As per the current income tax rules, you cannot claim any tax benefits for the home loan till you get possession of the house, i.e. during the pre-construction phase. Even if you have already started repaying the housing loan through EMIs during the construction phase. So that is your answer to the question of ‘can I claim income tax exemption on home loan without possession’.
But why is it so?
Because per Section 24 of the Income Tax Act, if a property is still under construction, there will not be any tax deduction on the interest payment during all of those years.
But don’t get disheartened yet.
There is something else that is available a little later on.
If you have purchased an under-construction flat or house and are paying some EMIs for that, then there would be an interest component of the EMI. The interest paid during the construction period can be claimed as a deduction only after the property is complete and ready for possession. Any interest paid before possession is tax-deductible in 5 equal installments beginning from the financial year in which construction was completed. So you get some tax deductions on interest payment but in a deferred manner and after completion of the house construction.
So if you were to ask “Can I claim tax benefit on EMI of loan taken for an under-construction flat?”, then the answer is yes you can. But after completion of the property and in five equal installments beginning from the financial year in which construction was completed. So you get no benefits during the Prior Period.
And what exactly is the ‘Prior Period’?
Prior Period is the period from the date of borrowing of home loan and up to the end of Financial Year immediately before the financial year in which the construction was completed. So it’s part of the construction period but starting from the date you took the home loan and up to the end of the financial year just before the one in which construction is complete (or you get possession).
So let’s say you purchase an under-construction property for which you took a home loan on 01-Aug-2021, and the construction of the property is completed on 22-Oct-2023. In this case, the ‘Prior Period’ will be from 01-Aug-2021 to 31-Mar-2023, i.e. at the end of the financial year (FY) just one before the FY in which the house construction gets complete.
And the interest that you pay during this Prior Period is called the Prior Period Interest (PPI), i.e. the interest during the pre-construction period. So in our previous example, the interest you pay during the prior period from 01-Aug-2021 to 31-Mar-2023 is the PPI or Prior-Period Interest.
So now let’s take another example to understand how the Prior Period Interest can be used after completion of the property to claim a deduction in 5 equal installments beginning from the financial year in which construction was completed.
Suppose you take a home loan of Rs 50 lakh for the under-construction house in July 2021. And you start paying the EMI for the same immediately (at least the interest component). Now the construction gets completed by January 2024. Let’s assume for simplicity, that the interest payment that you make during the next few years (while construction is on) is as follows:
- FY 2021-22 (from July 2021 to March 2022) = Rs 1.0 lakh
- FY 2022-23 (from April 2022 to March 2023) = Rs 1.2 lakh
- FY 2023-24 (from April 2023 to March 2024) = Rs 1.4 lakh
Now the home loan is taken in July 2021. The construction of the house gets completed (when you get the completion certificate) in January 2024. So in this case, the Prior Period is from July 2021 to March 2023.
So the Prior Period Interest is the total interest paid between July 2021 and March-2023. So, the total interest paid during the under-construction period is Rs 2.2 lakh (= Rs 1 lakh + Rs 1.2 lakh). And this is the amount that is available for deduction in the next few financial years.
Remember that after completion of the property, the Prior Period Interest can be used to claim a deduction in 5 equal instalments beginning from the financial year in which construction was completed.
So the amount of Rs 2.2 lakh can be claimed in 5 equal installments of Rs 44,000 each starting from Financial Year 2023-24.
This means that you get to claim an additional deduction of Rs 44,000 in Prior Period Interest during the next 5 financial years, i.e. 2023-24, 2024-25, 2025-26, 2026-27, and 2027-28.
That’s how pre EMI interest deduction under section 24 works in real life.
Note – In the FY2023-24, you receive a PPI interest deduction of Rs 44,000. But also, you get the deduction for the actual interest you paid during the year, i.e. Rs 1.4 lakh. Right? So the interest paid during the Financial Year 2023-24 i.e. Rs 1.4 lakh can also be claimed along with Rs 44,000 in. So the total interest that can be claimed as tax deduction under Section 24 for FY2023-24 will be Rs 1.84 lakh (= Rs 1.4 lakh + Rs 44,000). So you get to claim the Prior period interest amounts in addition to the normal interest for the next 4-5 financial years.
That’s a good example of the pre-construction interest deduction under Section 24.
You may now ask whether there are any limits to this tax benefit?
Yes. Since the home loan interest-related tax benefits come under Section 24, the aggregate limits under the Section 24 are still applicable on the sum of the normal interest you pay as well the prior period interest installment.
So hopefully, now all your doubts about income tax rebate on home loan for the under-construction property would have been addressed.
We have been talking about the interest component till now during the construction phase. But what about the principal component of the loan? Can you claim the principal component too that is repaid during the construction period? No. The principal component of your EMIs paid during the Prior Period is not eligible for any tax deduction or exemption.
So there is no pre-construction period principal repayment deduction. Sorry.
One more important thing to note is that the tax deduction can be availed only if the construction of the house or property is completed within 5 years of taking the home loan.
Here are a few more articles about home loans and related aspects:
- Best time to prepay home loans
- Should you buy a house as home loan rates fall?
- Home loan EMI calculator (excel download)
- Rs 25 lakh home loan EMI – and – Rs 30 lakh home loan EMI – and – Rs 40 lakh home loan EMI – and – Rs 50 lakh home loan EMI – and – Rs 1 crore home loan EMI –
- How to benefit from home loan rate cuts?
- Why home loan principal gets paid off slowly initially?
- How to quickly repay a Rs 50 lakh home loan?
- Don’t use all savings for a home downpayment
- How shorter tenure can save you money in home loans?
- Smart home loan management
- How much home loan can you get?
It’s very common in India for people to purchase an under-construction property as the prices of under-construction properties are lower than those of ready-to-move types in almost all locations. So it’s always a good idea to understand how and what is the tax implication of buying an under-construction flat or house before finally deciding to do so.
So that’s it about Under Construction House & Tax Benefits on Home Loan interest. To summarize – if the property is still under construction, there will not be any tax deduction on the interest payment for the construction years even if you have started repaying the housing loan through EMIs. But once the construction is complete, the interest for the pre-construction period (or prior period) can be availed for deduction in 5 equal installments from the financial year in which the construction of the house is completed.
That is how to claim deduction on interest payments on home loan of under-construction house in India (2023).