Tax implications for under construction properties

Mumbai: a city best known for its palatial properties and sky-rocketing prices. Hence, your ‘house hunting checklist’ will always favour under construction properties than a home that is ready for possession.

Once the hunt comes to an end, you leave no stone unturned to have the home loan process in place. However, soon enough, the tax deduction woes engulf you, and leave you in a soup. Hence, for you to have a smooth sail, we have some valuable information up our sleeves.

It is a well-known fact that Section 24 of the Income Tax Act prohibits the buyer to reap the tax benefits during the under construction period. However, a unique provision under the very same act has left room for the buyer to procure the tax deduction. Yes, the interest associated with the home loan will help you embark on this journey.

To make things simpler, we will give you a bird’s eye view on how to calculate the amount. First of all, you need to be aware of the term ‘priority period’.

Also known as the under-construction period, this period is marked from the year you borrow the home loan to 31st of March (the end of financial year), the one that precedes right before the year you procure the property. On the other hand, the interest that you are accountable to pay during this period is called prior period interest.

For instance, if your date of borrowal is 01.04.2007 and the date of acquisition is 07.06.2012, then the financial year preceding the year of acquisition is 31.03.2012.

Hence, the prior period will be from 01.04.2007 to 31.03.2012.

So, we add the interest over the years, and divide it by 5 since you will be receiving the money in five equal instalments.

Interest for the year 2007-2008 = ₹ 1, 40,000

Interest for the year 2008-2009 = ₹ 1, 20,000

Interest for the year 2009-2010 = ₹ 1, 00,000

Interest for the year 2010-2011 = ₹ 80, 000

Interest for the year 2011-2012 = ₹ 60,000

TOTAL INTEREST = ₹ 5, 00,000

The interest you will be receiving every year = ₹ 5, 00,000 / 5 = ₹ 1, 00,000

However, there are other factors that you need to bear in mind to have comprehensive knowledge:

  • If at all the date of acquisition of property and the date of borrowal happen to be the same, then you can avail the benefits under section 24 and not under the act associated with under construction property.

  • The principal component repaid during the pre-construction period is nowhere associated with the tax deduction process.

  • 18% GST is charged on two-third value of under construction properties.

So, know all about the tax implications to the tee to have an upper hand, when involved in the real estate scenario.