EMIs now, benefits later

Home loan repayment for an under construction property will get tax benefits only after the buyer takes possession.

Looking to buy a property? It involves long-term financial commitment and you have to be in a position to afford the investment. And if you are not in hurry, a property under construction could be a good option. For one, it is cheaper than readymade ones. Also, builders might allow you to make changes in the house.

The price difference can be substantial. The difference between a property-under-construction and a completed project is 10-15 per cent per square feet.

Banks have tie-ups with builders and that helps one to get pre-approved loans. But the banks release loan payment according to the stage of construction of the house - in a staggered fashion.

How does it work? For instance, the total cost of the property you have booked is Rs 50 lakh. The bank will release around 80-85 per cent of the loan amount, in most cases. The remaining amount (margin) is to be funded by the property buyer.

Out of the approved Rs 40 lakh, the bank will release the money in tranches, at different stages of construction. “The bank appoints a surveyor, who inspects the site of construction and the payment is made as per his assessment of the project completion,” said C S Jain, head - personal banking, IDBI Bank. Remember, the amount paid need not necessarily be the same as the demand made by the builder.

During the construction phase, the bank may release small amounts and pay the remaining amount on possession of the house. Say, in the first year, the bank pays 15 per cent of the sanctioned amount (Rs 6 lakh) for the first installment. In the next two years, till the house was completed, the bank will pay 10 per cent of the remaining amount each year (Rs 3.40 lakh and Rs 3 lakh).

The remaining amount (Rs 27.54 lakh) will be disbursed to the builder when the buyer gets possession of the house on completion.

Interest repayment: Banks provide two options to the borrower –

• Repayment can start as soon as the bank disburses the first tranche
• Repayment can start once the buyer has possession

If you choose the first option, some banks give the flexibility of choosing the amount you want to repay during the construction phase. “For under construction properties customers can choose the monthly installment they wish to pay, till the time the property is ready for possession. Anything paid over and above the interest rate by the customer goes towards principal repayment,” says Housing Development Finance Corporation’s (HDFC) website.

The benefit for starting payment earlier is that the tenure gets reduced, at least by a couple of years. “Also, if you pay on getting the possession of the house, the interest amount keeps mounting because of compounding, thereby increasing your liability,” added Jain.

Taxation: You only start enjoying the benefits of interest repayment on a home loan only once the property is completed. “That is because once the house is completed, any payment made towards interest and principal are considered for tax benefits,” said Homi Mistry, tax partner, Deloitte, Haskins & Sells.

But there is a benefit. The repayment of the home loan – both principal and interest payments – will qualify for tax benefits once you take possession. The earlier payments will be clubbed with the existing payments and tax benefits will come to you for the next five years. The existing limit for interest payment is Rs 1.50 lakh and the principal repayment will be included in the Rs 1 lakh investment limit under Section 80C of the Income Tax Act.

After completion, if the property is self-occupied, the municipal rate of the area will be considered to be the rent earned from the property. This income will get two deductions - property tax paid and interest repayment.

If there is a loss post these two parameters are considered, the loss can be carried forward for the next eight years. But it can be offset only against any gain made on a property transaction. In case, you wish to set-off the loss in the same year, it can be done against any other gains.

In case the property is being rented out, the income will get two deductions – Property tax paid and interest repayment. The rest of the income will be added to your ‘income from other sources’ and taxed, according to the applicable tax slab. There is no cap on the limit of exemption for interest repayment of a second property.