House Building Loan: Can you claim tax deductions while constructing your house?

  • September 17, 2022
  • CA Chandan Agarwal's Office

As the motive of taking a House Building Loan is to build a house, there are queries if the tax benefits may be availed while constructing the house.

Everybody aspires to get his/her own home – be it a flat or a house on a plot. However, to fulfill the dream of having a home, most people need to either take a loan or sell their old house to buy or build a new one.

Depending on usage, the housing loan may be categorised into Home Loan and House Building Loan. Where a Home Loan is used to buy a readymade home and a House Building Loan is used by a borrower to construct a house on his/her own plot.

As the Home Loan is meant to buy a readymade house, the tax deduction on the interest paid on a home loan may only be availed after taking possession of the ready-to-move-in house or flat.

However, as the motive of taking a House Building Loan is to build a house, there are queries if the tax benefits may be availed while constructing the house.

So, if a person takes a house building loan, can he/she claim tax deductions u/s 24B of the Income Tax Act during the construction period?

“No. Deduction can be claimed only after construction is complete,” said CA Karan Batra, Founder and CEO of CharteredClub.com.

Explaining the provisions, Dr. Suresh Surana, Founder, RSM India, said, “Section 24(b) of Income Tax Act, 1961 (hereinafter referred as the IT Act) allows deduction of interest where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. Such interest is allowed only with respect to ready to move in properties. In cases where interest on home loan is paid with respect to the under construction properties, the same is termed as Pre-construction/ Pre-Acquisition period interest.”

“Pre Construction/Acquisition period starts from the date of borrowing and ends on the last day of preceding Financial Year in which the construction is completed i.e. 31st March of the year in which Construction is completed or date of repayment of loan (whichever is earlier),” he added.

“The deduction of interest of the construction period i.e. Pre-construction period interest shall be allowed in five equal annual installments from the previous year in which the construction is completed. Thus, no deduction of pre-construction period interest can be claimed during the construction period,” Dr. Surana further said.

The borrower, however, can claim tax benefit on the principal repayment under the relevant provisions.

“However, the taxpayer may claim the principal component of the loan repayment u/s 80C of the IT Act in case of under construction property, which would be subjected to the threshold limit of Rs 150,000 per annum,” said Dr. Surana.

So, to start claiming tax deductions on the interest paid on a House Building Loan, the borrower should apply for the Completion Certificate soon after the construction is complete.

For that, the borrower has to approach the local authority – be it a development authority, municipal corporation or panchayat – as per the location of the house building site. The concerned authority will issue the certificate after thorough evaluation of the building to assure that the construction work has been executed in accordance with the defined norms and approved designs.

Source: https://www.financialexpress.com/money/income-tax/house-building-loan-can-you-claim-tax-deductions-while-constructing-your-house/2671262/
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