Know the Importance of Construction Completion under Income Tax Laws
Dec 19, 2016 Legal Guidance
Investing in real estate does come with lots of tax benefits for the property buyer. But there are several factors to consider before purchasing a property in order to maximise tax benefits. For starters, time taken to complete the construction of a property is very important for availing various tax benefits.
Let’s discuss a few income tax provisions which link the benefits with the time taken to complete the construction of one’s property:
Deductions related to the repayment of the principal component for home loan:
Under Section 80c of the Income Tax Act, an individual can claim benefits of up to Rs 1.50 lacs on repayment of a home loan’s principal component. However, repayment of the home loan, that is your EMI, does not start till the entire loan amount is disbursed. But, there is a catch here. If there are abnormal delays in the construction of your apartment, the EMIs may commence even before the property is completely built and handed over to you. In this type of case, you will not be able to claim tax benefits on principal repayments under 80C. This is because the same is allowable only in respect of a property, income from which is taxable under the head ‘income from house property’. Unless the property is completed and its possession has been taken, the same cannot become taxable. So, in case of major delays in the property construction, the buyer loses the opportunity to utilise tax benefits under Section 80C on account of repayment of principal amount of the loan.
Deductions related to the interest paid on loan taken for house construction:
As it is with the repayment of principal amount of home loan, the Income Tax Act also provides tax benefits for repayment of interest on home loan under Section 24. However, Section 24, unlike Section 80C, allows you to claim tax benefits on the interest paid during the period before you took possession, in five equal instalments beginning from the year of completion of construction. However, if there are delays in completion of construction, the opportunity to claim the interest paid on the loan will also be delayed.
Also, the duration taken for the completion of the construction determines the amount one can claim for interest if the house is self-occupied. You can claim interests upto Rs 2 lakh INR if the construction is completed within 5 years of the financial year in which the loan was taken. If the construction gets delayed and crosses the 5 year mark, then, you are entitled to claim only Rs 30,000 interest per year.
Also, you can claim full interest benefit if yours is a let-out property, even if construction is delayed.
Importance of claiming capital gains exemption:
The time required for the construction of property also plays a significant role to be entitled to tax benefits in long term capital gains. As per the Section 54 and 54F of the Income Tax Act, one is eligible for exemption from long-term capital gains tax if the gains are invested in a new house that is constructed within three years. Although there have been past cases where the buyers did get benefits under 54 and 54F even though there was a delay in constructions, it is always advisable to create one such roadmap that ensures the construction gets completed within 3 years to maximise your tax benefits.
Let’s discuss a few income tax provisions which link the benefits with the time taken to complete the construction of one’s property:
Deductions related to the repayment of the principal component for home loan:
Under Section 80c of the Income Tax Act, an individual can claim benefits of up to Rs 1.50 lacs on repayment of a home loan’s principal component. However, repayment of the home loan, that is your EMI, does not start till the entire loan amount is disbursed. But, there is a catch here. If there are abnormal delays in the construction of your apartment, the EMIs may commence even before the property is completely built and handed over to you. In this type of case, you will not be able to claim tax benefits on principal repayments under 80C. This is because the same is allowable only in respect of a property, income from which is taxable under the head ‘income from house property’. Unless the property is completed and its possession has been taken, the same cannot become taxable. So, in case of major delays in the property construction, the buyer loses the opportunity to utilise tax benefits under Section 80C on account of repayment of principal amount of the loan.
Deductions related to the interest paid on loan taken for house construction:
As it is with the repayment of principal amount of home loan, the Income Tax Act also provides tax benefits for repayment of interest on home loan under Section 24. However, Section 24, unlike Section 80C, allows you to claim tax benefits on the interest paid during the period before you took possession, in five equal instalments beginning from the year of completion of construction. However, if there are delays in completion of construction, the opportunity to claim the interest paid on the loan will also be delayed.
Also, the duration taken for the completion of the construction determines the amount one can claim for interest if the house is self-occupied. You can claim interests upto Rs 2 lakh INR if the construction is completed within 5 years of the financial year in which the loan was taken. If the construction gets delayed and crosses the 5 year mark, then, you are entitled to claim only Rs 30,000 interest per year.
Also, you can claim full interest benefit if yours is a let-out property, even if construction is delayed.
Importance of claiming capital gains exemption:
The time required for the construction of property also plays a significant role to be entitled to tax benefits in long term capital gains. As per the Section 54 and 54F of the Income Tax Act, one is eligible for exemption from long-term capital gains tax if the gains are invested in a new house that is constructed within three years. Although there have been past cases where the buyers did get benefits under 54 and 54F even though there was a delay in constructions, it is always advisable to create one such roadmap that ensures the construction gets completed within 3 years to maximise your tax benefits.
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