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A home loan borrower can claim Income Tax exemption on interest payments of up to Rs 2 lakh U/s 24B and another Rs 1.5 lakh under Section 80 C towards the principal repayment for a Self-occupied property. And another Rs.1 Lakh can get benefits U/s 80EE, Total benefits Rs. 2 Lakh + 1.5 Lakh + 1 Lakh = 4.5 Lakh..
However, you cannot seek these tax benefits in the pre-construction phase (i.e. no tax deductions available for an under construction house), even if you have started repaying the housing loan through EMIs.
Often it is seen that housing loan is taken but the possession of the property is received in the next or later financial years. It may be because the property is not completed or constructed.
The Section 24B of the Income Tax Act states that if a property is still to be constructed, there will not be any tax deduction on the interest payment for all of those years.
However, the interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete.
Let us understand certain terminologies related to an Under Construction house and home loan tax benefits.
What is Prior Period? (Under construction period)
Prior Period means the period from the ‘date of borrower of the home loan up to the end of the Financial Year’ immediately preceding the financial year in which acquisition was made or construction was completed.
The period from borrowing money until the construction of the house is called pre-construction period or under construction period.
For Example: If you have taken a home loan say on 01-06-2013, and the construction of the property is completed on 01-06-2014. The period commencing from 01-06-2013 to 31-03-2014 shall be treated as ‘Prior Period’.
What is Prior Period Interest (PPI)? (Pre-construction period interest)
Prior Period Interest means the interest from the ‘date of borrowal of the home loan up to the end of the Financial Year’ immediately preceding the financial year in which acquisition was made or construction was completed. The interest portion paid during the under construction period / Prior period is known as ‘Prior Period Interest’.
For Example: If you have taken a home loan say on 01-06-2013, and the construction of the property is completed on 01-06-2014. The home loan interest paid for the period commencing from 01-06-2013 to 31-03-2014 shall be treated as ‘Prior Period Interest’.
Let us now consider an example to compute PPI and how it can be claimed as a tax
Kindly remember that the aggregate limits under Section 24 are still applicable. The prior period interest installment plus ‘normal interest’ is allowed to the extent of Rs 2 Lakh only in-case of a Self occupied property. There is no such restriction if the property is a ‘Let-out’ one.
For example : Suppose a home loan is taken on Jan ,2012 and House is completed on 31.01.2015, in that case pre -construction Interest is taken from Jan 2012 to March 2014. Suppose bank has granted and disbursed the Loan in Jan 2012 but EMI started from Jan 2013.Then Interest from Jan, 2012 to Jan 2013 is treated as Pre-EMI interest by the bank.
- Can I get tax benefits if I take a loan to buy a Vacant plot or land? – No. You get no tax breaks if you take a loan to buy a plot of land.
Generally, the prices of under construction properties are lower than the prevailing market rates in a locality. So, some home loan buyers do prefer to buy them. But do it with open eyes, because apart from the obvious risk of delay in construction, you may also get some other financial hiccups if there are long delays.
The delayed possession of the house could exert severe financial pressure on the home buyer if he / she have to pay the EMI as well as the rent at the same time. Moreover, if the project gets stuck or even defaults, the home buyer is still liable to pay the interest and the principal component of the disbursed amount to the bank.
If there is a delay in the possession of the property, the tax benefits also get delayed to that extent.