Investing in real estate is a significant decision, and understanding the tax benefits associated with tax benefits on under construction properties can make this investment even more advantageous. Here’s a detailed guide on how you can benefit from tax incentives while investing in under-construction properties.
1. Understanding Tax Deductions on Home Loan Interest
One of the primary tax benefits of investing in tax benefits on under construction properties is the deduction on home loan interest. Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to ₹2 lakh per annum on the interest paid on a home loan for a self-occupied property. This deduction is available only if the construction of the property is completed within five years from the end of the financial year in which the loan was taken. If the construction is not completed within this period, you can still claim a deduction of up to ₹30,000 per annum.
2. Benefits Under Section 80C
Under Section 80C of the Income Tax Act, you can claim a deduction of up to ₹1.5 lakh on the principal repayment of your home loan. This benefit is available for both under-construction and completed properties. However, it is important to note that the deduction is available only when the construction of the property is completed. If the property is under construction, the deduction will only be available once the construction is completed and possession is taken.
3. Tax Benefits on Pre-EMI Payments
When investing in under-construction properties, buyers often pay pre-EMIs (Equated Monthly Installments) before the construction is completed. According to the Income Tax Act, you can claim tax benefits on the pre-EMI interest payments. These payments can be claimed under Section 24(b) as part of the interest on home loans, but the total deduction is limited to ₹2 lakh per annum, similar to the interest deduction on a completed property. However, the pre-EMI interest is considered as a part of the total interest paid, and the deduction is available only after the construction is completed.
4. Tax Deduction on Principal Repayment
While the principal repayment of a home loan for under-construction properties is eligible for tax benefits under Section 80C, the deduction is available only after the construction is completed and the property is occupied or is deemed to be completed. This means you cannot claim the principal repayment deduction during the construction period. However, once the property is completed, you can claim the entire amount of principal repayment under Section 80C up to the limit of ₹1.5 lakh.
5. Deduction on Home Loan for Second Property
If you own multiple properties, the tax treatment for under-construction properties remains similar to that of a self-occupied property, with the additional benefit of claiming deductions for the interest on home loans. For properties other than the self-occupied property, the rental income is subject to tax, but you can still claim deductions for the home loan interest under Section 24(b) for up to ₹2 lakh, while the remaining interest can be carried forward and claimed in subsequent years.
6. Claiming Benefits on Joint Home Loans
In cases where the home loan for an under-construction property is taken jointly with a family member, both the borrowers can claim tax deductions on the interest and principal repayment. Each borrower can claim up to ₹2 lakh on the interest paid and ₹1.5 lakh on the principal repayment under Section 80C, provided that both borrowers are co-owners of the property and are jointly repaying the loan.
7. Capital Gains Tax Implications
If you decide to sell an under-construction property before its completion, the capital gains tax implications will depend on the holding period and the type of property. For properties held for more than three years, long-term capital gains tax applies, and you can claim exemptions under Section 54 or Section 54EC if you reinvest the gains in specified assets. If sold within three years, short-term capital gains tax will be applicable.
Conclusion
Investing in tax benefits on under construction properties offers several tax benefits that can enhance the attractiveness of your investment. From deductions on home loan interest and principal repayments to benefits on pre-EMI payments, understanding these tax advantages can help you make informed financial decisions. Ensure you keep accurate records of all payments and consult with a tax professional to maximize your benefits and ensure compliance with tax regulations.
By leveraging these tax benefits, you can optimize your investment in under-construction properties and achieve greater financial efficiency.
