Importance of Construction Deadline

There are several provisions under the present income tax laws which are closely linked with construction of a house property affecting the individual tax payers. In this article I am discussing these provisions and their connection with allowability of certain deductions or exemptions.

Deduction for repayment of housing loan

Section 80 C of the present Income Tax Act, allows a deduction of upto  Rs. 1,00,000 towards repayment of principal for home loan taken from specified institutions of entities, along with other expenses and investments.  This deduction is available only when the property is in the possession of the tax payer.

The time gap between the date when you take the loan and when you start repaying the same is normally not more than one month in case the property being purchased is ready to move in and the possession is taken immediately.

However in case the home loan is taken for construction of a property or for booking an under construction property, normally the lending institutions do not recover any principal till the construction is complete. If there is inordinate delay in completion of the construction, the lender may ask you to repay part of the principal also. In such a situation, you will not be able to claim income tax benefits in respect of such principal repayments because the allowability of such deduction has a basis that  income from such property is taxable under the head “Income from House Property” or not.

The property can not be subject matter of the head “Income from House Property” unless the property is in your possession. So you should be careful when you are booking any under construction property so as to ensure that you get the tax benefits of repayment of home loan. It is pertinent to note that the proposed Direct Tax Code, which is expected to be operative from 1st April 2012, does not have provision for allowing any tax benefits in respect of repayment of home loan.

Deduction in respect of Interest paid on loan taken for construction of a house property

Section 24 allows you deduction in respect of interest paid on loan taken for various purposes related to a house like purchase, construction, repairs, renovation or reconstruction. For claiming the interest payments on the loan taken for the above purposes, the condition of possession of the house is essential like in the case of eligibility for principal repayment.

However the income tax laws allow you deductions in respect of interest paid for the period before you took the possession and started repaying the loan. This is called pre EMI interest. The pre EMI interest in respect of the financial years prior to the year in which construction of the property is completed and possession is taken is allowed to be claimed for five equal installments. The claim of first such installment is to be made in the year in which you take the possession of the property.

In addition to the Pre EMI interest, the period within which the construction of the property is completed is very important in respect of the self-occupied properties which have been constructed with borrowed capital after 1st April 1999. Normally you can claim an amount of Rs. 1, 50,000 in respect of interest paid for such self occupied property.

In case of such self-occupied property, the construction of the properties should be completed and possession of the same be taken within a period of three years from the end of the financial years, in which the capital for construction was borrowed.  In case the construction is not completed and acquisition of the property could not be done within a period of three years as aforesaid, the deductions in respect of interest shall be restricted to Rs. 30,000 only.

Importance for claiming exemption of capital gains:

Section 54 allows you an exemption of capital gains on sale of a residential house property which has been held for 36 months or more if the capital gains computed after indexation are either invested for the purchase of another house within a period of one year before or two years after the date of  sale of the first house.

You also have an option to invest such capital gains, for the construction of house property within a period of three years from the date of transfer of the original residential house. Booking of an under construction house through a builder or developer is also treated as construction.

For claiming exemption of tax on long-term capital gains which arise on the sale of any long-term asset other than a house property, you are required to invest the net sale consideration (gross consideration less expenses incurred in connection with such sale) in stead of net capital gains for purchase or construction of house property as above under Section 54 F.

What is important here with regard to the period of three years is completion of the construction and not just utilization of the money for the purpose of construction of the property. In order to avoid jeopardizing of the exemption on long-term capital gains on sale of house property or other assets by investment in construction of house property, you should ensure that the construction of the house property is completed within the period of three years from sale of your original assets.

I hope that from the above discussion it is clear that for claiming various benefits under the present Income Tax Laws the actual completion of construction and taking over of the possession is very important. If you are not careful about the deadlines of construction as required under the Income Tax Laws, you may miss on some of the income tax benefits, which otherwise you would have been able to avail.

So start monitoring the construction deadlines now!
Even tax laws support you in this discipline.

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