From the phrase “Roti, Kapda aur Makan”, it is evident that Makaan is one of the three basic needs of a person. A person puts in a significant portion of his present and future savings in order to have a roof over his head. Earlier people used to get the house constructed with the money received on their retirement but nowadays young persons are able to get this dream fulfilled with the help of easy availability of home loan and are able to fulfil this dream in the prime of their youth. In this article I wish to cover two aspects related to home loan for the purpose of construction of a house. Firstly I wish to cover the feasibility of availing a home loan for the construction of a house. Secondly I will cover tax benefits available on home loan for the construction of a house.
Home loan eligibility:
As far as availing a home loan is concerned, the lenders treat loan taken for ready to move in house property and a booking of an under-construction property on the same footing with regard to eligibility, tenure and rate of interest. However in case of booking for an under-construction property, the disbursement of such loan happens in stages linked with the stages of completion of the construction. There are ample lenders willing to lend for such properties.
However in case of self-construction of a house on your own plot of land, you have relatively lesser number of lenders willing to give you loans. In case of self-construction on a plot, the buyer can go for a composite loan which would include the cost of the plot and cost of construction both. The lender will disburse you its part of the loan after you have fully contributed for your share in the cost. The lender releases money in tranches on the basis of certificate provided by an architect or civil engineer. You also have to submit photograph in support of the stage of completion of the construction. In some of the cases the lender may depute its own architect for verification of the stages of completion of the construction in stead of relying on the certificate furnished by you.
Repayment of such loans in the form of EMI (Equated Monthly Installments) starts once the lender has fully disbursed the loan which normally coincides with completion of the construction. However it is not necessary that the EMI will only start after completion of the construction. Till such time your regular EMIs start, you may have to pay the interest on the money already disbursed by the lender. This is known as pre-EMI interest.
As per the provisions of Section 80 C, you are entitled to claim an amount upto Rs. 100,000 for principal repayment of the home loan obtained from banks, Housing Finance Companies etc. along with other deductions like ULIP, PF, PPF, ELSS, NSC etc. However in cases where you have already started paying EMI which includes interest and principal even before completion of the construction, you cannot claim any deduction on account of any principal repayment made before construction of the property is completed. Moreover in case you sell the property, constructed within five years from the end of the financial year in which possession of the house is taken, all the deductions claimed by you on account of such repayment will be reversed and shall be treated as income of the year in which you sell such property.
In addition to the tax rebate for repayment of the loan under Section 80C you are allowed to claim rebate under Section 24 (b) in respect of interest paid on such loans. However the benefit for payment of interest can only be claimed from the year in which construction of such property is completed. However unlike principal repayment before completion of the construction, you do not lose your right to claim the interest paid before completion of the construction. You are allowed to claim the accumulated Pre- EMI interest paid till the year prior to completion of the construction in five equal instatements along with your regular interest for the year.
In respect of self-occupied property generally you can claim interest upto Rs. 1.50 lakhs. However this claim of Rs. 1.50 lakhs comes down to Rs. 30,000 in case construction of the house is not completed within a period of three years from the end of the year in which this loan was taken. In case the house is let out you can claim full interest in respect of such loan. It is interesting to note that there is no provision for reversing the tax benefits availed under Section 24(b) if the house is sold before completion of five years from the end of the financial year in which it was completed.
This way you can see that construction of a house gives you various benefits but the various time limits have to be met so that you do not lose the various benefits available for construction of a house.