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Should you buy that under construction flat during Diwali?

Diwali is a festival of joy and new beginning in life. To enhance the experience of the new beginning, there is a tendency to start anew--to buy new things, feel rejuvenated to smell the goodness of life.

Rajiv Raj
www.creditvidya.com

Diwali is a festival of joy and new beginning in life. To enhance the experience of the new beginning, there is a tendency to start anew--to buy new things, feel rejuvenated to smell the goodness of life. Counting on these anticipations, it is no wonder that advertisers buy the first page of newspapers and prime time slots of many channels to sell you your dream home.

It has been observed that many real estate players launch new projects and offer discounts to say first 50 buyers. On the one hand, there are some who offer home electronics, on the other hand there are a few real estate players who pay for stamp duty and registration charges of the buyer. Considering all these concessions, does it make sense to buy an under construction house?

One obvious benefit that you get while buying an under construction house is the discount offered for per square foot of the total area of the house. Typically, builders offer per square foot rate of a house at the stage of launch of the project between 20-25% lower than that what you have to pay when you buy the house for ready possession. So, if you buy such under construction house, your cost may go down compared with a ready to move in house. Also some builders to facilitate buying provide lucrative concessions in under construction flats. Builders sell houses by allowing buyers to pay almost 80% of the price after the house is built. These benefits are difficult and cost accretive in a ready to move in house.

While these advantages appear convincing and tempting, there are certain issues that you need to bear in mind, while buying an under construction house. The biggest disadvantage is the execution risk. After funding crisis in 2008, many builders took their time to complete the projects. Waiting period in some cases have surpassed five years, and in some cases, high costs have forced builders to abandon projects mid-way. For this, many experts advise investing with reputed builders to minimise this risk. However, being with reputed builders need not guarantee timely completion of project.

Then there are legal issues involved. Commencement certificate is a must for an under construction flat. If the builder does not have one, just avoid booking in such projects. Also ensure that the builder or developer should have clear ownership of land. If the project is mortgaged to a bank, ask the builder to arrange for a no objection certificate from the financier of the project. Either you do it yourself or engage a lawyer. There is another alternative. Go for a home loan and the bank or housing finance company will do it for you. A point to note here is even if a project is 'approved' by a bank it does not guarantee that the project will be completed in time.

Many times the offer 'limited for first 50 bookings' don’t match the buyer's interests. Sometimes customers fail to check the specifications of the 'to be constructed flat'. Understand that it is not necessary that the builder would offer you the same amenities which he showed in his sample flats. For example, some sample flats do have modular kitchens, chandeliers and large LED TV, but in the agreement, these are not included.

Beside this, there are also specification differences concerning area of the flat. These include the issue related to built-up area, super-built area and carpet area. In a built flat, however one can measure the area with a help of measuring tape.

While buying into an under construction property, many base their decisions by assuming that there is no need to pay the complete amount. But this is not true if you are opting for home loan. Banks nowadays are insisting on full EMI amount assuming that you have taken full sanctioned amount and not the part of it you have utilised. Though this way, the loan gets repaid early, this is burdensome for some buyers.

Many times buyers factor in tax benefits while booking a house. For a ready to move in  house, under section 80 C of the Income Tax Act, 1961, you can claim a tax deduction of Rs 100,000 per year for the repayment of principal. You also get deduction up to Rs 150,000 a year under section 24 of the Income Tax Act, 1961, for each financial year.  But an under construction house limits tax benefits. In case of under construction property, your payment towards interest are classified as pre-EMI payments and are deductible in five equal installments over five years, after construction is completed. Tax benefit for principal repayment may not be allowed. It is better to take into account all these advantages and disadvantages, associated with purchase of a flat, and then call up the sales guy at the builder's booking office.

The writer is a Co-founder & Director at  www.creditvidya.com .

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