Under Construction House: How to Claim a Tax Deduction on Home Loan Interest Payments?

Right from offering financial ease to buy a housing property, to the rise in social status, to the Home Loan Tax Benefit, there are a lot of benefits of acquiring a Home Loan. While a lot of people do know about how to secure a low rate of interest by opting for a state-owned SBI Home Loan, or other public sector banks; they hardly know about how to enjoy the tax benefits that come along a Housing Loan.

Let’s discuss how to tap maximum tax savings while repaying a Home Loan in this article.

Home Loan Tax Benefits on Principal Repayment

As per Section 80 of the Income Tax Act, a Home Loan borrower can avail a deduction of up to Rs. 1.5 Lakh on the amount paid towards the principal component of the Home Loan. To avail this deduction, it is mandatory that the property is not sold off within the first 5 years of obtaining the possession. In case, the borrower sells off the property, the claimed deduction will be reversed in the year in which the property is sold.

It is important to note that such a deduction is only available after the completion of the construction of the property.

Home Loan Tax Benefits on Interest Paid

If a borrower avails a Home Loan for a property with the intention of residing in the same, as per Section 24 of the Income Tax Act, they are entitled to a deduction of up to Rs. 2 Lakh on the interest paid in a year. In case the borrower avails the Home Loan for a let out property, they are entitled to claim a deduction on the entire interest amount. In this case, there is no upper limit on the deduction.

Here, it is essential to understand that the construction of property must be completed within 5 years– from the end of the financial year, in which the Home Loan was availed. Moreover, the deduction can only be availed once the construction of the property is completed, regardless of the year in which the loan was taken.

Home Loan Tax Benefits for Under-Construction Property

To understand the concept of tax benefits for under construction property, you must first understand what is meant by Pre-Construction Interest.

As the name suggests, a Pre-Construction Interest is applicable from the financial year of the disbursal of Home Loan up till the preceding year when construction of the property is rendered complete. The interest paid during this period is referred to as Pre-Construction Interest. When a Home Loan is availed for an under-construction property, the borrower is entitled to claim deduction on the pre-construction interest, over 5 equal instalments, in addition to the actual deduction on the interest under Section 24. 

For example, if you availed a loan in June 2016 for an under construction property, and the construction is completed in April 2019, the interest levied on the Home Loan in the years 2016, 2017 and 2018 will be deemed as pre-construction interest. 

Pre-Construction Interest Calculation

While the concept may sound a little perplexing, the calculation of the pre-construction interest is rather easy. To begin with, the borrower must be aware of the date of disbursal of the Home Loan, as well as the date of completion of the construction of the residential property. Based on the date of completion, the borrower can conveniently arrive at the financial year preceding the year in which the construction was completed.

Once the borrower is aware of the pre-construction period, they can calculate the Interest paid in this duration. Then, by simply dividing the Pre-Construction Interest by 5, the Home Loan borrower can arrive at the amount for which the deduction can be claimed.

Pro-Tip

Please note that if the deduction on interest is claimed for the Home Loan on a property in which the borrower intends to stay, the cap of Rs. 2 lakh will still be applicable. Here, the borrower will only be able to enjoy a maximum deduction of Rs. 2 lakh on Pre-Construction Interest + Actual Interest, in any given financial year.

How to Claim Tax Benefits on Home Loan

In order to claim Home Loan Tax Benefits on an under construction property, the borrower must look for the ‘Deductions’ section, at the time of filing the income tax returns, wherein, claims can be made for Deductions under Section 80 C, Deductions under Section 24 as well as Deductions under Section 80 EE.

To support the claim, the borrower must be ready with bank statements as well as other relevant documents. To this end, the borrower may be asked to submit few or all of the below mentioned documents:

• Proof of ownership of property
• Proof of date of purchase of the property
• Certificate of completion of construction of the property
• Loanagreement on the name of the borrower
• Loan Certificate

That is all, about claiming Home Loan Tax Benefits for an under construction residential property. Use this information to your benefit, and make the most of your Home Loan. Contact us at MyMoneyMantra today !

Also read : Claiming Tax Benefits on Your Home Loan is Easy Now

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