House under construction? Check out your tax provisions

You all must be aware that you get the following tax benefits on the EMIs that you pay for your home loan:

Deduction of the interest portion of the EMI up to a sum of Rs.1.50 lakhs (under section 24 of the I.T. Act) and Deduction of the principal portion of the EMI within the Rs.1 lakh limit of Sec 80C.

These deductions, however, are available ONLY AFTER the property is complete and ready for occupation.

Many properties are, however, bought during the construction period. Since the developer has to be paid as per the construction schedule, the loan disbursements happen during this period. Therefore, for many people the EMI payments start even while the property is under construction. In other words the property is still not complete and ready for occupation.

For such EMIs, paid during the under-construction phase, the following tax provisions will apply:

NO DEDUCTION for the principal portion u/s 80C. In other words, principal amount repaid during construction enjoys NO tax benefit.

No "immediate" deduction of the interest portion. Instead, all interest paid up to the year, prior to the year of completion, is accumulated and then 1/5th of this amount is allowed as deduction every year for 5 years from the year of completion.

If the construction is completed during the year, then the interest during the initial months when the construction is still on, is included with the interest during later months after completion...no bifurcation is necessary in the year of completion.

For example if you get the completion certificate in Dec 2013, then the interest paid from Apr to Dec 2013 will be included in post-completion interest (i.e. from Jan to Mar 14) and the usual tax provisions i.e. Rs.1.5 lakhs maximum deduction will apply. Total interest paid till Mar 2013, will be added-up and allowed as deduction in 5 equal annual instalments from 2013-14 to 2017-18.

Unfortunately, however, given the high property prices, the loan amounts are also quite high. Accordingly, in many instances the normal interest itself usually exceeds the limit of Rs.1.50 lakhs. Therefore, even if 1/5th of the under-construction interest can be deducted, there isn't sufficient limit available to do so.

Hence, in many cases, in addition to the Principal part, even the tax benefit on the Interest part during construction is possibly lost.

Fortunately, in smaller cities and towns the property prices and consequently the loan amounts are not very high. Secondly, recent budget gives additional Rs.1 lakh limit (only for the first-time home buyers) to loans up to Rs.25 lakhs for properties worth less than Rs.40 lakhs. Third, in recent months, the interest rates have softened. As such, this problem of not being able to utilize the tax benefit on interest paid during construction, may not arise in Tier II and Tier III locations.