Tax Benefit on Home Construction Loan

Many people desire to own a home in India but prefer constructing it themselves. Such people should, therefore, consider home construction loans as the best financing option. Nevertheless, what is not known by many is that home construction loans come with substantial tax benefits from the Indian Government. To lessen their financial load and make home ownership easier, one needs to understand these tax incentives.

In an Indian context, this paper will touch on the basics of tax benefits on home construction loans, describe simple terms used therein, and elaborate on who qualifies for such benefits.

What Does a Home Construction Loan Mean?

Home construction loans are special credits that are given to individuals who wish to construct their own houses on land that they already own or those planning to buy it subsequently. This kind of loan differs from normal housing loans because it disburses funds piecemeal, following steps taken place throughout the building process as opposed to giving everything at once. This process often avoids cases where, at any given time, the borrower is overburdened by the huge amount of money he has to pay.

Also Read: A Guide on Home Loan Balance Transfer

Types of Tax Benefits on Home Construction Loan

Taking a construction loan doesn’t just provide the funds to build your house; it also comes with significant tax benefits. Here’s a breakdown of the benefits you can avail:

• Tax Deduction on Interest Paid (Section 24): Under Section 24 of the Income Tax Act, a borrower is eligible to claim a tax deduction on the interest paid for a home construction loan. You can claim a deduction of up to ₹2 lakh per year, provided the construction is completed within five years from the end of the financial year in which the loan was taken. This deduction on interest reduces your taxable income, resulting in substantial tax savings.
• Tax Deduction on Principal Repayment (Section 80C): Besides the interest deduction, you can also claim a benefit on the principal repayment of the loan under Section 80C. The maximum deduction allowed under Section 80C is ₹1.5 lakh per year. However, this deduction applies only after the construction is completed. This means that both the interest and the principal repayment deductions can be claimed once the house is ready to occupy. One can use a tax saving calculator to determine how much they can maximize their tax savings.

Key Points to Remember:

• The maximum tax deduction on account of interest payment under Section 24 is capped at Rupees two lakhs per annum.
• The deduction under Section 80C is capped at ₹1.5 lakh and is only applicable after construction completion.
• Also, stamp duty and registration charges can be part of tax deductions under ₹1.5 lakh limit stipulated in Section 80C. However, this is a one-off benefit that will be claimed in the year when these charges are incurred.

Eligibility Criteria for Tax Benefits

• Purpose of Loan: The loan should be used exclusively for building a residential property.
• Timeline for Completion: One can only claim tax benefits associated with this type of loan after the house construction is completed and becomes habitable.
• Loan Holder: One can only claim tax deductions if one borrows the money and owns the property.
• Let-Out Property vs Self-Occupied Property: Apart from self-occupied buildings, different regulations apply when a house is rented out. For let-out properties, there is no upper limit on the total interest paid on home construction loans.

Also Read: 5 Ways to Increase Home Loan Eligibility

Tips on how to maximise tax benefits

• Joint Loan for High benefits: If the home construction loan has been taken jointly with a family member, each co-borrower can claim these reliefs on the repayment of principal and interest, amounting to double tax savings.
• Pre-Construction Period interest: Also, it is worth noting that during the period of building your house, there are income tax deductions available because one is required to pay interest on that new mortgage. Consequently, at the end of this construction, within the limits of Rs 2 lakhs under section 24, such expenses are allowed to be taken into account in five equal parts.

In conclusion,

Understanding these tax benefits before embarking on a home construction project will save you a lot when finally implementing your dream house. In summary, these benefits could assist in reducing your overall amount payable to the government, thereby making it easier for you to repay your home construction loan. For this reason, always use available advisors on tax matters or professionals who specialize in financial planning for further guidance regarding the subject.

Ready to start building your dream home? Apply now for a home construction loan and take advantage of these benefits on your home construction loan!

FAQs

Q.1. Is there a tax benefit for a home construction loan?

A. Section 80C — Under this Section, you can claim deductions on the principal component of your home construction loan. After the construction, you can claim a maximum deduction of Rs. 1.5 lakhs.

Q.2. Can I claim tax benefits for a house under construction?

A. The Income Tax Act allows for reductions in acquitted assets that do not surpass INR 1.5 lakh a year, while INR 2 lakh per year may be deducted because of interest on a home loan meant to construct a house.

Q.3. Can I get tax benefits on a home renovation loan?

A. A home renovation loan fetches you a tax benefit on the interest component — which is a deduction of up to INR 30 thousand p.a. (under section 24) for the interest that you pay on these loans.

Q.4. Can I claim 80EEA for under-construction property?

A. Under Sec 80EEA of the Income Tax Act, one can claim a deduction for the interest required to be paid on the housing loan. Note that the taken-out loan should have been used to acquire a residential house. The construction of a residential house is not covered in this section.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise, based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.