The timeless phrase "roti, kapda aur makaan" underscores that shelter is one of humanity's three fundamental necessities. Individuals dedicate a substantial portion of their current and future savings to securing a home. Traditionally, people often built houses using retirement funds, but today, the widespread availability of home loans enables younger generations to realize their homeownership dreams much earlier in life.
Understanding Home Loan Eligibility for Construction
When it comes to securing a home loan, financial institutions generally treat loans for ready-to-move-in properties and bookings for under-construction units similarly in terms of eligibility, tenure, and interest rates. However, for under-construction properties, disbursements are typically made in stages, aligned with the progress of construction. Many lenders are open to financing such projects.
Financing Self-Construction on Your Own Land
For those planning to construct a house on their own plot, the pool of willing lenders is somewhat smaller. In such cases, buyers can opt for a composite loan that covers both the land cost and construction expenses. Importantly, the lender will only disburse funds after the borrower has contributed their full share. Disbursements occur in tranches, based on certificates provided by your architect or civil engineer, often accompanied by photographs to verify construction stages. Some lenders may even deploy their own engineers or architects to inspect and confirm completion milestones instead of relying solely on your documentation.
Repayment through Equated Monthly Installments (EMIs) usually begins once the loan is fully disbursed, which often coincides with construction completion. However, EMIs need not wait until construction finishes entirely. Until regular EMIs commence, borrowers may need to pay interest on the already disbursed amounts, known as pre-EMI interest.
Navigating Tax Benefits for Construction Loans
Under Section 80C of the Income Tax Act, you can claim deductions of up to ₹150,000 for principal repayments on home loans used for constructing or purchasing a residential property. This benefit is available alongside other deductions like ULIP, PF, PPF, ELSS, and NSC, provided the loan is from banks or Housing Finance Companies.
Key Conditions and Limitations
If you start paying EMIs—covering both interest and principal—before construction completion, you cannot claim deductions for principal repayments made during this period. Additionally, if you sell the property within five years from the financial year in which possession is taken, all previously claimed deductions are reversed and treated as income in the year of sale. Note that this principal repayment deduction is only available under the old tax regime.
Interest Deductions Under Section 24(b)
Beyond principal repayment benefits, Section 24(b) allows deductions for interest paid on loans taken for construction, purchase, repairs, or renovation. You can claim this benefit from the year construction is completed. Unlike principal repayments, you do not forfeit the right to claim interest paid before completion. Pre-EMI interest paid until the year before completion can be claimed in five equal instalments, starting from the year construction finishes and possession is obtained.
Under the old tax regime, you can claim interest up to ₹2 lakh for a maximum of two self-occupied properties combined. This limit reduces to ₹30,000 if construction is not completed within five years from the end of the financial year in which the loan was taken. For let-out properties, full interest can be claimed, with losses up to ₹2 lakh under house property income allowed to be set off against other income.
In contrast, the new tax regime offers no interest deductions for self-occupied properties and does not allow setting off losses under the house property head against other income. For let-out properties, interest can be claimed up to the taxable amount under the new regime. Notably, there is no provision to reverse tax benefits availed under Section 24(b) if the house is sold within five years of completion.
Constructing a house offers numerous advantages, but adhering to various timelines is crucial to fully leverage the available benefits. By understanding eligibility criteria and tax provisions, prospective homeowners can make informed decisions to optimize their financial planning.
