Ready or under construction property? Here is how to decide

Balwant JainA question which generally bothers almost all the home buyers is whether one should go for a ready to move in house or book an under construction house. There are pros and cons involved in both the options. In this article I will try to explain as to why one should go for a ready to move in house against going for an under construction property. The discussion is divided in two parts.  First part deals with general financial implications of going for a ready to move in house and the second part deals with income tax  implication for such decision.General Financial implicationsAs the saying goes one in hand is better than two in bush.  The option of going for an under construction property has an inbuilt risk of default on the part of the builder in handing over the possession as promised.  Delay in possession  if not default from the builders is the rule rather than an exception. The decision in favor of a ready to move in house does not have that risk.  You get immediate gratification for the money being spent.  Going by the trend in the redevelopment segment every Tom,  Dick and Harry have become builder without having adequate financial resources.  Not only dely due to financial problems even a litigation related with the property may also affect the completion of the project on scheduled time.

Since you invest your savings of life either of past or future savings in the form of EMI,  in a residential house, it is not at all advisable to put your life time saving to risk for a small difference,  between the ready to move in property and one under construction.In contrast to the risk involved in booking an under construction property, ready possession flat offer you one more benefit. In case you intend to shift your self in the new house, you can save on rentals which you are presently paying.  Alternatively in case you are buying the house for investment purpose the same can be let out and your investment in the house can start generating immediate returns for you.Taxation ImplicationsIn addition above explained general financial implications  there are income tax implications of the decision of going for a ready possession property against under construction one.  Generally people  take housing loan for the purpose of buying house. The benefits of home loan for a residential house are available only after the construction of property is completed and possession is taken. However in respect of the interest paid on housing loan  for the years prior to the year in which you take possession, the income tax laws allow you to claim the same in five equal installments beginning from the year in which you take the possession. So in case of self occupied house property where the maximum amount of interest benefit generally restricted to Rs. Two lakhs and in case the regular annual interest on your home loan is already more than two lacs the benefit of amortization of interest paid prior to completion of the construction is practically lost for ever.Please note that the benefit of Rs. 2 lacs for interest on home loan for self occupied house property is available only if construction is completed within three years from end of the financial year in which the home  loan was taken.  So in case the construction of your house is not completed within three years  as stipulated your eligibility for home loan interest  drastically comes down to Rs. 30,000 in case the same is used for your own residence. So in addition to the risk of delay and default for an under construction property you are carring the risk of reduced income tax benefits in case the construction is not completed within three years.Income tax laws also allow you exemption from payment of capital gains resulting from sale of any asset held for more than 36 months  if you either buy a house within two year after or before one year of such transfer. Alternatively you can claim such exemption if you construct a house within three years.  So in case the builder fails to complete the construction in the stipulated period, you again carry the risk of having to pay capital gains tax which you had planned to save.Moreover for repayment of home loan principal you get a deduction of upto Rs. One lakh fifty thousands along with other eligible items.  This benefit is also available only after you have taken  possession. So in case you have repaid part of the home loan during the construction period, you lose the tax benefit for repayment forever as there is no legal provision for amortization of the benefits unlike the interest paid during the construction period.  And finally going for a ready to move in house will give you more peace of mind than going for an under construction property.  The above discussion is valid in case you have ability to make the down payment for a ready property otherwise you have no choice but to go for an under construction property. So take you own call after evaluating pros and cons of both the options as the situation and depending on your financial strength.