Chat Transcript

  • Balwant Jain

    Oct,15,2020, 14:00 hrs

    Deduction for interest for an under construction property

    Balwant Jain , Chief Editor, Apnapaisa

  • Balwant Jain:

    Good Afternoon. Welcome to the chat.

  • guest: .

  • Balwant Jain:

    It seems the builder is trying to mislead you. On every disbursement made to the builder directly by the bank, you will need to pay interest which is called Pre- EMI interest at the rate provided in the agreement. If the disbursements are high, the Pre-EMI interest will be quite significant and certainly will not be 200 or 300 rupees as claimed by the builder.Pre-EMI is the simple interest which is payable on a home loan taken for an under-construction property where the loan is disbursed on the basis of progress of the construction. It starts from date of disbursement of the loan. The Pre EMI does not have any principal component. The actual loan repayment in the form of an EMI normally starts when the entire loan has been disbursed to the builders. You have the option to ask the bank to not disburse the entire amount before completion of the project and the bank will accordingly disburse the money partially to the builder as per the terms of the contract between them.Please note that the bank does not guarantee the construction of the property in time and it is your liability if the construction is delayed.

  • guest: Can the Pre EMI paid be claimed in any future year after the date of occupancy. My Pre EMI for 3 years is approx 3.5 lakhs and my interest paid per year after the possession is approx. 2.8 lakhs per year, of which I can claim only 2 lakh as per the limit of tax benefit. If I claim my pre EMI currently will I get the benefit? Does the limit of 2 lakh include the pre EMI also? So can I claim my Pre EMI in the year may be 10th or 15th year when my actual interest paid will be much lesser?

  • Balwant Jain:

    Very interesting question. Pre-EMI interest paid can be claimed in the five equal installments starting from the year of the completion of the construction. If the property is let-out, then you can claim the entire interest payable as a deduction without any restriction including the pre EMI interest subject to restriction on set off of loss under the income from house property income against other income during the same year. If the property is is self-occupied then the limit for deduction is Rs.200000 including the pre-EMI interest. You cannot claim the Pre-EMI interest after 5 years have passed from the year of completion of construction. So for all practical purposes you pre EMI interest is lost except that you can add this to your cost of the house.

  • guest: What is the time allowed between plot purchase and construction start if i have applied for home loan for the same?

  • Balwant Jain:

    Different banks have different clauses for commencement of construction after purchase of the plot. While not all banks put the condition of commencement of construction. However, most banks allow a gap of 2-3 years within which the construction should begin. If you construct the house within one year from purchase of the plot, the bank may give you home loan including cost of plot of the land. No tax benefits are available in respect of loan to buy a bare plot. However if you have taken a composite home loan to cover cost of the plot and construction cost, you will be able to claim the tax benefits if the construction is completed within five year from the end of the financial year in which the loan was taken.

  • guest: I want to apply for Home Loan. The property is under construction and possession is due in December 2021. In case builder does not provide possession on the agreed time then what can we do? I will have to pay house rent for current accommodation and Pre-EMI for home loan too. What can we do with respect to Home Loan as well as penalty to builder?

  • Balwant Jain:

    The bank does not take the responsibility of any delay on the part of the builder in completing the construction for any reason. You will have to continue to pay the Pre-EMI to avoid becoming a defaulter. The builder may not compensate for the losses due to delay in construction unless specified by him in the agreement. In respect of delay in handing over possession in contravention of the terms agreed, you will have to file a complaint with RERA authorities or to consumer courts for redressal against the builder.

  • guest: If the property (for which I have taken a home loan) goes under some kind of legal dispute or builder stops construction, what will happen to the loan? Will I need to keep paying EMI? How will the property insurance help in such cases?

  • Balwant Jain:

    The loan agreement is between you and the lending bank and is independent of your agreement with the builder. In case of any legal dispute and stoppage of construction by the builder, you still will have to keep on paying the EMI. Property insurance does not cover risks arising out of matters pertaining to delay due to builder`s fault or legal dispute. Property insurance covers you against loss or damage to the property. You are liable to pay the home loan EMI`s to your bank to avoid becoming a defaulter. Basically it is the buyer (i.e. you) who is responsible for proper due diligence and on checking on the property title. Banks have no responsibility in such a situation even if they have carried out their part of diligence.

  • guest: My husband and I have taken a joint home loan in Jun-18 for an under-construction house. We have now got possession of the house in September 2020. We have been paying pre-EMI so far. We stay in a rented accommodation and plan to shift to the new house in April 2021. For the current financial year 2020-2021, can we claim tax benefits on the pre-EMI amount, in addition to the tax benefit on rent paid.

  • Balwant Jain:

    One can claim not only the pre EMI interest but also the full interest paid during the year, in which you get the possession of the property irrespective when you shift in to the house. Since you have already taken the possession during the current year, you can claim the interest payable for the full financial year ended March 31, 2021. Additionally you can claim 1/5th of the pre EMI interest paid/payable till March 31, 2020. You can claim HRA provided you have actually paid rent. Claim of HRA is independent of your right to claim tax benefits on home loan.

  • guest: I am buying a house which is under construction, in Thane area. The bank has agreed to fund me. The disbursal will be made directly to builder upon his demand letter and the EMI for interest part will be debited from me. I am a salaried person. Can I get Income Tax benefit on the EMI I am paying to the bank even though the flat is under construction.

  • Balwant Jain:

    In respect of interest paid on loan taken for under construction property, you can not get the income tax benefits in respect of interest paid during the year as long as property remains under construction during that year. However you can claim the entire interest paid during the construction period in 5 equal installments beginning from the year in which you obtain possession. This claim of interest which is called pre EMI interest will be within the overall limit of Rs. 2 lakhs in case the property is self-occupied. In case the house is let out there is no limit on the interest but you will not be able to set off loss beyond 2 lakhs against current year`s income. The unabsorbed loss however will be allowed to be carried forward for set off against house property income for eight years.

  • guest: I want to buy a plot of 8 lacs INR. What percent of the property value will I get as loan? In that case, will there be any tax benefit, if I do not start construction immediately?

  • Balwant Jain:

    Lenders are generally not willing to lend for purchase of pure plot unless you are planning to construct a house there. Normally, lenders will not finance more than 60% to 65% of the total cost of the plot and the remaining 35% to 40% has to come from your own sources. No tax benefits are available on a pure plot loan except that you can add the interest to the cost of plot. You have to start the construction of the house within a reasonable time to be able to get a loan on the cost of construction including the cost of the plot. In case the loan is granted by the bank on the value of cost of construction including the cost of the plot, you will be able to claim income tax benefits in respect of interest payments as well as for repayment of loans if the house is completed within five years from the end of the financial years in which the loan is taken.

  • guest: Please let me know if loans on construction linked basis - are eligible for income tax rebates.

  • Balwant Jain:

    In respect of interest and repayment of a home loan, you can avail the tax benefits only from the financial year in which the construction is completed. However in respect of interest paid during the construction period, you can claim the total interest paid during the construction period in 5 equal installments beginning from the year in which the construction is completed. This claim of interest will be within the overall limit of Rs. 2 lakhs in case the property is self-occupied. The overall limit for deduction in respect of self occupied property shall be Rs. 30,000 only if the property is not ready for occupation within 5 years from the end of the financial year in which the first loan disbursement is made. As far as tax benefits in respect of capital portion of loan repayments is concerned in cases where the EMI’s have already started before completion of construction, no deduction is allowed unless and until the construction is completed and the tax benefit in respect of principal portion repaid during the earlier years is lost forever.

  • guest: Which option is preferable - Pre-EMI or complete EMI?

  • Balwant Jain:

    The concept of Pre-EMI interest is applicable where the disbursement of the loan is made in stages depending on the progress of the construction of the property. Typically you pay simple interest every month on the cumulative disbursements made till date and the regular EMI begins only after the final disbursement is made. Some lenders allow you to pay EMI on each partial disbursement made. You can choose either of the option. A point to remember however is that you can get tax deduction benefit on home loan repayment only from the financial year in which the construction is completed irrespective of whether you pay Pre-EMI or EMI on part payment. So in case you have exercised the option of EMI before completion of the construction of the property the benefit in respect of repayment of principal is lost for ever which otherwise would have been available under Section 80C had you started repaying the EMI after completion of the construction,

  • Balwant Jain:

    Thank you everyone for joining in.