Home loan: Why completion of construction is important

Balwant Jain 

There are a number of tax provisions which link tax benefits with the time taken to complete construction of your house. Let us discuss these provisions.

Rebate on housing loan

Section 80C allows you tax benefits for principal repayment of home loan up to Rs 1.50 lakh.  In case of an under-construction property or for self-construction of a property, your EMIs do not start till complete loan amount is disbursed in full which generally coincides with the completion of construction. In case of inordinate delay in completion of construction, your EMI may start even before completion of the construction. In such a situation, you will not be able to claim tax benefits in respect of such principal repayments as the same is allowable only in respect of a property, income from which is taxable under the head “Income from House Property”. Unless and until the property is completed and possession taken, the same cannot become taxable and thus in case of such delay you lose the benefit of principal loan amount repaid before taking the possession.

Deduction on interest paid for housing loan 

Section 24 allows you deduction in respect of interest paid on money borrowed for purchase, construction, repairs, renovation or reconstruction of a house. Here also, the condition of completion and possession is important before you can claim this benefit. However, unlike Section 80C, Section 24 allows you to claim the interest for the period before you took the possession, referred to as pre-EMI interest, in five equal instalments beginning from the year of completing of construction. So more the period taken for completion of the construction, the more delayed is your right to claim the interest on such money borrowed already paid by you.

In addition to delayed entitlement to claim the pre-EMI interest, the period taken for completion of the construction will also determine the amount which you can claim for interest in case the house property is self-occupied. If construction is completed within three years from the end of the financial year in which the money was borrowed, you can claim interest up to Rs 2 lakh but in case of delay beyond three years, your entitlement gets curtailed to Rs 30,000 in a year. This amount of interest entitlement is for the current year’s interest as well as for amortised portion of the pre-EMI interest taken together.

So if interest for the current year itself is significant, the delay would effectively restrict your claim of pre-EMI interest as well as even the current year’s interest. It may be noted that for a let-out property, you can claim full interest benefit even if the construction is delayed beyond the three years period.

Claiming exemption of capital gains

Section 54 and Section 54F allow you exemption from long-term capital gains if a new house is constructed within three years. So it is important that the construction of house should be completed within three years. However, in case like Kishore H Galaiya Vs ITO decided in 2012, the Mumbai tribunal has held that even if substantial amount is invested/spent for construction of the house and even though construction is not completed in three years, the exemption under Section 54 and 54F would be available. However, in case of delay in completion of construction, the income tax officer may take a different view in your case and you may have to file an appeal with higher authority for claiming the exemption. So it is always advisable to ensure that the construction is completed within three years to avoid any litigation.

The above discussion makes it clear that completion of construction is very important for ensuring various tax benefits available.

The author is CA, CS and CFP. 

He is currently working as Company Secretary of Bombay Oxygen Corporation Limited. 

The views expressed in this article are his own