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  7. Home Loan Tax Benefits on Under Construction Property

Home Loan Tax Benefits on Under Construction Property

Updated on: 03 Feb, 2025 07:25 PM

Many of us aspire to have a place to call our own, as owning a home brings unparalleled happiness and satisfaction. While purchasing a completed house is usually expensive, it comes with the tax benefits on the loan interest paid. On the contrary, constructing a home is a more economical option, though it lacks the tax benefits associated with loan interest. Nevertheless, for self-built homes, the interest paid on the loan can be claimed in five equal installments commencing from the year of completion or acquisition.

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What is Prior Period or Under Construction period?

The under-construction period, also known as the pre-possession phase, refers to the duration from the initiation of a house loan until the construction is finished or possession is obtained. You cannot immediately deduct the loan interest you pay during this time. However, individuals have the option to claim this interest in five equal installments commencing from the year of completion or acquisition.

How Section 24 Affects Your Tax Savings on Under-Construction Property

As per the Income Tax Act of 1961, Section 24B, homeowners are qualified for a tax deduction of up to ₹2 lakh per financial year on the interest paid for a home loan used for purchasing the house. Nevertheless, this deduction is only applicable if the owner of the property physically resides in it during the year and has it registered in their name. Additionally, Section 24 of the Income Tax Act does not permit tax deductions for properties that are still under construction.

This deduction becomes applicable upon completion of construction and the homeowner assumes ownership of the property. The maximum interest deduction in each financial year is capped at ₹ 2 lakh, containing the interest accrued in the current year as well as one-fifth of the interest paid during the construction period. So, it's not just about owning a home but also understanding the nuances of tax benefits tied to its possession.

Under Construction House Tax Benefits Under Section 80C

Since the under-construction stage of the house is well-defined and no principal amount is owed during this period, the eligibility for claiming tax benefits under Sec.80C does not occur. The under-construction period concludes only when the equated monthly installment (EMI) payments commence. Later, the principal amount becomes claimable under Sec.80C.

Under Construction House Tax Benefits Under Section 80EEA

Section 80EEA came into effect starting from the assessment year 2020-21, providing a deduction under specific conditions:

  1. The taxpayer must be an individual.
  2. The individual should not be eligible for any deduction under Sec.80EE.
  3. A loan has been taken for acquiring a residential house property.
  4. The loan is sanctioned by a financial institution (i.e., a bank, banking institution, or housing finance company) between April 1, 2019, and March 31, 2022.
  5. The stamp duty worth of the residential house does not exceed ₹45 Lakh.
  6. The taxpayer does not own any residential house on the date of the loan sanction.

One can claim a deduction U/S 80EEA if these conditions are met. The deduction is applicable to the interest payable on the specified loan, limited to ₹1,50,000 or the actual interest amount, whichever is lower.

This deduction is available for the assessment year 2020-21 and subsequent assessment years. However, if the interest is claimed as a deduction under Section 80EEA, it cannot be claimed again under Section 24(b) or any other provision of the act.

Frequently Asked Questions

Q- What are the tax implications of under-construction property?

The tax liability varies based on the classification of the property as either short-term capital or long-term capital. For short-term capital gains, the profit is added to the individual's income, and the applicable tax is determined by the income tax slab they fall within. In contrast, long-term capital gains (LTCG) attract a tax rate of 20%, along with additional cess and surcharge.

Q- What is the 54 exemption for under-construction property?

To be eligible for an exemption under Section 54, the taxpayer must acquire another house within one year before or two years after the date of transferring the old house. Alternatively, they can construct another house within three years from the date of transfer.

Q- Which deduction on home loan interest Cannot be claimed when the house is under construction?

The deduction for home loan interest is not applicable during the construction phase of the house. It becomes claimable only once the construction is completed. The duration from the borrowing of funds until the completion of the house is termed the pre-construction period.

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Kamal Murarka

Kamal Murarka
Director - Tax Research & Operations

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Kamal Murarka, a Chartered Accountant, is the Director- Tax Research & Operations at Tax2win. He has been with the company since its inception, contributing his expertise in national and international tax assignments. He is also a recognized speaker on tax-related topics, representing Tax2win at various industry forums. His deep knowledge and strategic insights have been crucial in shaping Tax2win’s approach to tax research, operations, and client solutions, driving the company’s continued success.