Under Construction House Tax Benefits on Home Loan

Under Construction House Tax Benefits are entirely different than the ready-to-occupy or completed house home loan tax benefits. Many of us avail the home loan mainly because of the tax benefits. However, we forget one important aspect of understanding what are the tax benefits available for under-construction houses.

Yesterday I was confused when this issue was raised by RIA in one of our professional Whatsapp groups. Hence, thought to write a detailed post on this.

In many cases, you avail of the loan but the construction of the property is not completed. You may be paying just interest during this period or the regular EMIs which involve principal and interest. But whether one can avail of the tax benefit like regular ready-to-move-in property home loans under Sec.80C, Sec.24(b), and Sec.80EEA?

What is Under Construction Period or Prior Period of House?

Prior Period or under construction period means the period commencing on the date of borrowing and ending 31st March immediately prior to the date of completion of construction/date of acquisition or date of repayment of the loan, whichever is earlier.

Under Construction House Tax Benefits

Let me explain the same with an example. Suppose Mr.X takes a loan of Rs.40,000 at 15% per annum for the construction of a house on 1st June 2016. Construction of the house was completed on 20th January 2022. Then the pre-construction or under construction or Prior Period is the period between 1st June 2016 to 31st March 2021 (being 31st March 2021 is immediately prior to the date of completion of construction/acquisition).

Now, let us say if the repayment of the home loan begins on 31st January 2027 or on 30th June 2023, then the pre-construction period ends on 31st March 2021 itself. So the pre-construction period in these cases is from 1st June 2016 to 31st March 2021.

However, let us assume that repayment of the loan is from 31st October 2019, then the pre-construction period ends on 31st October 2019 (being 31st March 2021 immediately prior to completion of construction or date of repayment of the loan, whichever is earlier). In this case, the pre-construction period is from 1st June 2016 to 31st October 2019 (but not 31st March 2021).

This “WHICHEVER IS EARLIER” is not mentioned in any online posts (after referring to many related posts). However, it is clearly mentioned in the book “Taxmann’s Direct Taxes Law and Practice” By Dr.Vinod K Singhania and Dr.Kapil Singhania, which I am referring since many years for updating my tax knowledge. Referring to the same for your benefit.

This clears many doubts with respect to both Sec.24(b) and Sec.80C.

Under Construction House Tax Benefits Under Sec.24(b)

How to calculate the Pre-Construction Period or Prior Period Interest?

1. Get the date when Home Loan started.
2. Get the Date of completion, possession or start of the loan EMI.
3. Find the last date of the Financial Year immediately preceding the date of Completion / Acquisition (if you have not started the loan repayment). However, if you have started the loan repayment before the completion or acquisition of the property, then the start of loan EMI should be the end of the under-construction period (as explained in the above example).
4. Calculate Pre-construction Period or Prior Period = Period from Step 1 to Step 3
5. Calculate Pre-construction or Prior Period Interest i.e., the total interest paid during the prior period.
6. Calculate Allowable prior period interest (APPI). APPI = Prior period interest as per Step 5 divided by 5.
7. Claim the Allowable prior period interest or 1/5  of total Period Interest in 5 different years while filing ITR along with current year interest under Sec.24(b).

Two important points with respect to Sec.24(b).

1. The limit of Rs 2,00,000 includes current year interest and the pre-construction period interest.
2. In view of the fact that housing projects often take a longer time for completion, it is proposed that clause (b) of section 24(b) be amended to provide that the Deduction under the said provision on account of Interest paid on Home Loan for acquisition or construction of a self-occupied house property shall be available if the acquisition or construction is completed within FIVE years from the end of the financial year in which capital was borrowed.

This amendment will take effect from the 1st day of April 2017 and will, accordingly apply in relation to the assessment years 2017-2018 and subsequent years.

Also, note that if both, the date of loan taken and the occupation date/completion or EMI start date had taken place in the same Financial year, then the entire interest pertaining to the pre-construction period can be claimed along with regular interest in the same assessment year. There is no need to claim the prior period interest in 5 installments.

Under Construction House Tax Benefits Under Sec.80C

As the definition of under construction of the house is clear and no principal is going to be payable during this period, claiming of tax benefits under Sec.80C will not arise. However, as and when the EMI will kick start, then the period of under construction of the house will also be over, and hence, the principal can be claimed under Sec.80C.

Under Construction House Tax Benefits Under Sec.80EEA

Section 80EEA has been inserted with effect from the assessment year 2020-21. Deduction under this section is available if the following conditions are satisfied –

1. The assessee is an individual.
2. He is not eligible to claim any deduction under Sec.80EE.
3. He has taken a loan for the purpose of acquisition of residential house property.
4. The loan is sanctioned by a financial institution (i.e., a bank or banking institution or a housing finance company) between 1st April 2019 and 31st March 2022.
5. The stamp duty value of the residential house property does not exceed Rs.45 Lakh.
6. The assessee does not own any residential house property on the date of sanction of loan.
7. If the above conditions are satisfied, then one can claim a deduction under Section 80EEA.
8. The deduction is available in respect of interest payable on the above loan or Rs.1,50,000, whichever is less.
9. The deduction is available for the assessment year 2020-21 and subsequent assessment years.
10. However, if interest is claimed as a deduction under Section 80EEA, such interest is not again deductible under Section 24(b) or under any other provision of the act.

As this Sec.80EEA does not impose any requirement of possession, one can claim the exemption as soon as you start interest payment towards your home loan.

I hope I have cleared the concept in a simple way of Under Construction House Tax Benefits on Home Loan.