Claiming Home Loan Interest for Under-Construction Property: Rules
- Bhavika Rajput
- 2 hours ago
- 10 min read
When purchasing a home, the financial burden is not limited to just the down payment but extends to various other costs, including home loan interest. Fortunately, the Indian Income Tax Act offers several tax benefits related to home loans, making homeownership more affordable. These benefits apply to individuals who are paying interest on home loans for both completed and under-construction properties. Let us explore how you can claim home loan interest for under-construction properties, the specific rules around pre-construction interest deductions, and the benefits available for first-time homebuyers under Section 80EEA. Understanding these provisions will help you maximise your tax savings and minimise your overall financial burden.
Table of Contents
Claiming Home Loan Interest for Under-Construction Property
When you purchase a property under construction, you begin paying your home loan EMIs before the construction is completed. Many people are unaware that the Indian tax laws allow you to claim a deduction for the interest paid on a home loan for under-construction properties, but there are some conditions. For under-construction properties, the interest can be claimed once the construction is completed or even during the construction period, with specific provisions for claiming the interest in phases. The deduction will be available once the house is completed, but you will need to keep track of the payments made during the construction phase.
Rules for Pre-Construction Interest Deduction
Under the Income Tax Act, taxpayers can claim the interest paid on a home loan during the pre-construction period as a deduction. Pre-construction interest is the interest paid by the taxpayer before the possession of the house. This interest can be claimed in five equal installments, starting from the year in which the construction is completed. The total amount of interest that can be claimed during the pre-construction phase is limited to ₹2 lakh per year, under Section 24(b)of the Income Tax Act. It is important to note that the deduction will only be allowed after the construction is complete, and the property is ready for possession. This phase allows homeowners to start claiming deductions incrementally once the construction concludes.
Claiming Home Loan Interest After Construction Completion
Once the construction of the property is complete, homeowners can begin claiming the interest paid on the home loan as a part of their annual deductions. The maximum limit of interest deduction is ₹2 lakh per annum for self-occupied properties. This deduction is available under Section 24(b) of the Income Tax Act. If the property is rented out, the entire interest paid on the home loan can be claimed as a deduction, subject to certain conditions. For rented properties, there is no cap on the amount of interest that can be claimed. It is essential to ensure that the property is ready for possession or is being rented out in order to claim the home loan interest after construction completion.
Principal Repayment Deduction for Under-Construction Properties
Homeowners can also claim a deduction for principal repayment under Section 80C of the Income Tax Act, even for under-construction properties. The deduction is available up to ₹1.5 lakh per annum for both the principal repayment and other eligible investments. However, the principal repayment deduction can only be claimed once the construction of the property is completed. Similar to the home loan interest deduction, the deduction for principal repayment can be claimed only when the property is completed and ready for possession. This deduction is not applicable during the construction phase; however, once the property is completed, homeowners can begin claiming the deduction in their annual returns.
Interest Deduction for Let-Out Properties
If the property is let out, the entire interest paid on the home loan, irrespective of whether it is under construction or completed, is eligible for deduction. There is no limit to the amount of interest that can be claimed for a let-out property, unlike the ₹2 lakh cap for self-occupied homes. However, the rental income from the property will be taxed as income under the head "Income from House Property." The entire interest paid on the home loan will be allowed as a deduction, which helps in reducing the taxable rental income. It’s essential to keep track of the rental income received and expenses incurred for the property to claim this deduction properly.
Tax Benefits for First-Time Homebuyers Under Section 80EEA
First-time homebuyers can benefit from additional tax relief under Section 80EEA. This section offers a deduction of up to ₹1.5 lakh on interest paid on home loans for the purchase of affordable housing properties. The property must be valued at ₹45 lakh or less, and the loan must have been sanctioned between April 1, 2019, and March 31, 2022. This deduction is over and above the ₹2 lakh limit available under Section 24(b) for home loan interest. First-time homebuyers can benefit from this additional tax deduction, thus lowering their overall taxable income and making the purchase of their first home more affordable.
Key Takeaways
1. Home loan interest for under-construction properties can be claimed as a deduction, but only after the property is completed. For individuals who have taken out a home loan to finance the purchase of a property under construction, the interest paid on this loan is eligible for deduction under Section 24(b) of the Income Tax Act. However, the key thing to note is that this deduction can only be claimed once the construction of the property is completed, and it is ready for possession. The interest paid during the construction period is accumulated and is eligible for tax deduction only once the property is completed. Before that, the deduction cannot be claimed.
2. Pre-construction interest can be claimed in five equal installments once the property is ready for possession. While the interest paid on the home loan for an under-construction property cannot be deducted until the construction is completed, the law allows taxpayers to claim a deduction for the interest paid during the construction period after the property is ready for possession. The interest paid before the property is completed is considered pre-construction interest. This pre-construction interest can be claimed in five equal installments, starting from the year in which the construction is completed, and these installments can be claimed annually for the next five years. This provision enables taxpayers to benefit from the interest paid during the construction phase, even though the deduction cannot be claimed until the property is ready for possession.
3. Principal repayment deductions under Section 80C apply only after the property is complete. Under Section 80C, taxpayers can claim deductions for the principal repayment of a home loan, subject to the overall limit of ₹1.5 lakh. However, it's important to note that this deduction can only be claimed once the construction of the property is completed. Principal repayments made during the construction phase cannot be claimed as deductions under Section 80C. Similar to the home loan interest deduction, this deduction becomes applicable once the property is ready for possession, and it continues to be available for the years in which the loan is being repaid, up to the maximum limit.
4. The entire interest paid for a let-out property is deductible, with no cap on the amount. For a property that is let out and generates rental income, the entire interest paid on the home loan can be deducted under Section 24(b) of the Income Tax Act. There is no upper limit on the amount of interest that can be deducted in this case. The deduction for interest on a let-out property is available for the entire interest paid during the year, regardless of the amount. This deduction is beneficial for property owners who have rented out their property and are generating income, as it reduces their taxable income significantly.
5. First-time homebuyers can avail of additional deductions under Section 80EEA for affordable housing, subject to certain conditions. First-time homebuyers can claim additional tax benefits under Section 80EEA if they purchase an affordable housing property. Under this section, homebuyers can claim an additional deduction of up to ₹1.5 lakh on the interest paid on home loans, over and above the deductions under Section 24(b). To be eligible, the property must meet the criteria of “affordable housing,” such as a specified value limit, and the loan must be sanctioned by a financial institution. The deduction is available only if the individual is a first-time homebuyer, meaning they have not previously owned a residential property. This provision encourages first-time buyers to purchase affordable homes by providing them with additional tax benefits.
These key takeaways highlight the important tax benefits available for home loan borrowers, particularly those purchasing under-construction properties or looking to buy affordable homes for the first time. By understanding these provisions, taxpayers can maximize their home loan-related deductions and reduce their taxable income effectively.
Conclusion
Claiming tax benefits on home loans is an excellent way to reduce your overall tax liability and make homeownership more affordable. Understanding the rules related to home loan interest deductions, especially for under-construction properties, is essential for maximizing your savings. Whether you're a first-time homebuyer or someone looking to claim deductions on an under-construction or completed property, there are several provisions in the Income Tax Act to help you. By properly navigating these provisions, you can optimize your tax savings and achieve your homeownership goals more efficiently. For anyone looking for assistance in tax filing and home loan interest deductions, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1: Can I claim home loan interest for an under-construction property?
Yes, you can claim home loan interest on an under-construction property. However, the deduction for the interest will only be available after the construction is completed. Until that time, the interest amount is not eligible for tax deductions. Once the construction is finished, you can start claiming the interest deduction as part of your total annual deductions under Section 24(b) of the Income Tax Act.
Q2: How do I claim the pre-construction interest deduction?
Pre-construction interest refers to the interest paid on the home loan during the construction period. This interest can be claimed in five equal installments, starting from the year the construction is completed. These installments can be spread over five years, beginning from the year when the property is completed and ready for possession. The total deduction for pre-construction interest is capped at ₹2 lakh per annum.
Q3: What is the maximum limit for claiming home loan interest deduction?
The maximum deduction for home loan interest under Section 24(b) is ₹2 lakh per year for self-occupied properties. For properties that are rented out, there is no upper limit on the amount of interest that can be claimed. However, there are provisions to carry forward the loss if the total interest deduction exceeds the income from the property.
Q4: Can I claim principal repayment for an under-construction property?
Q5: What tax benefits are available for first-time homebuyers?
First-time homebuyers are eligible for an additional deduction of up to ₹1.5 lakh under Section 80EEA for home loan interest. This deduction is available provided the home loan is taken for a property that has a value of up to ₹45 lakh and the loan is sanctioned between April 1, 2019, and March 31, 2022. The individual must also not have any other residential property at the time of the loan sanction.
Q6: Is there any tax benefit for interest paid on home loans for let-out properties?
Yes, you can claim the entire interest paid on home loans for let-out properties as a deduction under Section 24(b) with no upper limit. This means that if your rental income is less than the interest paid on the loan, the difference can be carried forward to future years for tax purposes. This provides significant relief to individuals who own properties that generate rental income.
Q7: Can I claim both pre-construction interest and post-construction interest?
Yes, you can claim both pre-construction interest and post-construction interest, but there are limits. The pre-construction interest can be claimed in five equal installments after the property is completed, while the post-construction interest is claimed annually. The total interest claim for a self-occupied property is capped at ₹2 lakh per year, but for let-out properties, there is no cap.
Q8: Is principal repayment allowed for both self-occupied and let-out properties?
Yes, principal repayment can be claimed for both self-occupied and let-out properties. Under Section 80C, taxpayers can claim up to ₹1.5 lakh in principal repayment deductions, which includes repayment on home loans for both types of properties. This deduction is part of the overall ₹1.5 lakh limit for Section 80C deductions, which also includes investments like PPF, ELSS, and NSC.
Q9: Can I claim tax benefits for a second home loan?
Yes, you can claim tax benefits for a second home loan. This includes claiming deductions for home loan interest under Section 24(b) and principal repayment under Section 80C. For the interest deduction under Section 24(b), the limit of ₹2 lakh applies for self-occupied properties, and there is no cap for let-out properties. The principal repayment for the second loan is also eligible for deductions under Section 80C, subject to the overall ₹1.5 lakh limit.
Q10: Is there any benefit for claiming home loan interest on second-hand homes?
Yes, home loan interest can be claimed for second-hand homes, as long as the loan is used to purchase or construct the property. The interest deduction is the same as for new properties, with a maximum limit of ₹2 lakh per year for self-occupied homes under Section 24(b). This makes second-hand homes eligible for the same tax benefits as newly purchased properties, helping reduce the tax burden.
Q11: Can I claim home loan deductions if I sell the property?
If you sell a property before completing the required period for tax benefits, you may lose out on some of the claimed deductions. For instance, if you’ve claimed home loan interest and principal repayment on a property and decide to sell it within a few years, you will have to reverse the deductions previously claimed. In such cases, the deductions may be added back to your taxable income.
Q12: Can I claim tax benefits for a home loan if the property is rented out?
Yes, if you rent out the property, you can claim tax benefits for the home loan, including both interest and principal repayment. For rental properties, there is no upper limit on the home loan interest deduction under Section 24(b), and you can also claim the principal repayment under Section 80C, subject to the ₹1.5 lakh limit. Additionally, any rental income from the property will be taxable after accounting for deductions such as home loan interest and maintenance expenses.
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