Tax Benefit on Under Construction Property

Buying an under-construction property is often seen as a financially sound move. Prices are typically lower than ready-to-move-in homes, and there’s often greater flexibility in payment schedules. But what many buyers don’t realize is that these properties also come with significant tax benefits provided you understand how and when to claim them.

In this comprehensive blog, we break down the various tax benefits associated with under-construction flats. We’ll also touch upon topics like stamp duty and registration charges, home loan interest deductions, and common pitfalls to avoid, so you can make the most out of your investment.

What Exactly Is an Under-Construction Property?

An under-construction property is one where the construction is ongoing and possession hasn’t been handed over to the buyer. These properties offer affordability and potential for capital appreciation, but they also come with tax-saving opportunities that become relevant at specific stages.

Understanding the Tax Benefit on Under-Construction Property

You may be wondering if you can start claiming tax deductions as soon as you start paying your EMIs. The short answer: No. But don’t worry, those payments still count just not immediately.

Under Indian tax laws, the tax benefit on under construction property comes into play only after possession. But once you receive possession, the benefits can be substantial.

Tax Benefit on Home Loan Before Possession

If you're servicing a home loan for an under-construction property, you're likely paying EMIs. These EMIs typically include both principal and interest components. However, the Income Tax Act does not allow you to claim these deductions right away.

You cannot claim tax benefits on principal or interest until the construction is complete and you obtain possession. This means there’s no immediate tax benefit on home loan before possession. But all is not lost- you can claim deductions retrospectively, which we explain below.

Interest on Under Construction Property Tax Benefit

Once you receive possession, you can start claiming deductions on the interest portion under Section 24(b) of the Income Tax Act.

Here's how it works:

The interest you pay during the construction period is termed "pre-construction interest."

This interest is not deductible in the same year it is paid.

However, once you get possession, you can claim the total pre-construction interest in five equal annual installments.

For example, if you paid Rs. lakhs as interest before getting possession, you can claim Rs. lakh each year for the next five years, in addition to the regular post-possession interest deduction.

The maximum cap for interest deduction under Section 24(b) is Rs. lakh per year for a self-occupied property.

Principal Repayment and Section 80C

The principal portion of your EMI becomes eligible for deduction under Section 80C but only after you get possession.

The maximum limit under this section is Rs. 1.lakh per annum and includes:

1. Principal repayment

2. Stamp duty

3.Registration charges

It’s essential to note that you can claim these only in the year you make the payment and only after the property is registered in your name.

Tax Benefit on Stamp Duty Registration Charges of an Under Construction Property

Many homebuyers overlook this important aspect. Yes, you can claim a tax deduction on stamp duty and registration charges, but again, timing matters.

Under Section 80C, these charges are eligible for deduction in the year of payment. However, you must have completed the construction or taken possession to claim this benefit.

If you pay stamp duty and registration fees during construction and the property is not yet registered or completed, you cannot claim the benefit until possession.

Common Mistakes to Avoid

Assuming EMIs = Immediate Tax Relief: Deductions only start after possession, not during construction.

Ignoring Pre-EMI Documentation: Keep track of all interest paid during construction; you’ll need this to claim pre-construction interest.

Delaying Registration: To claim stamp duty and registration deductions, the property must be in your name.

Selling Too Early: If you sell the property within five years, all deductions claimed under Section 80C (especially principal) can be reversed.

How to Maximize Tax Benefit on Under Construction Property

Maintain Records: Keep all loan statements, payment receipts, and interest certificates.

Plan Possession Strategically: If possible, take possession before March of a financial year to start claiming deductions that year.

Coordinate with Your CA: Ensure your chartered accountant is aware of all payments and timelines.

Final Thoughts

An under-construction flat may delay your tax savings, but it doesn’t deny them. By understanding when and how to claim each deduction, you can maximize your financial benefits and reduce your overall tax burden.

So, if you're planning to invest in an under-construction property, don’t just focus on the price or the floor plan. Factor in the long-term tax benefits they could make a huge difference in your total cost of ownership.