How to get tax benefit on under construction property in India?

There are many reasons why people may prefer buying an apartment that is under construction, as opposed to a readymade flat. While readymade flats are convenient and complete, under-construction or self-constructed flats or properties have different financing and tax provisions. While there is credit risk on the builder, the disbursement of the loan is different in terms of an under-construction flat and you can claim deductions based on the same. Very often, flats that are under construction are less expensive than ready-to-move flats; however, inordinate delays can cause mounting costs and hence buyers should be wary while investing in under construction properties. Tax implications for under-construction or self-constructed property According to Section 24 and Section 80C of the Income Tax Act, a person availing of home loans can claim exemption of tax, both on interest payment as well as principal payments. The person who is taking the home loan can expect a deduction of Rs 1.5 lakh on the interest portion of the EMI that he or she is paying towards the construction and Rs 1 lakh of the principal portion of the EMI, of home loans that are taken from banks and other housing finance companies. These tax exemptions however, cannot be availed of before the construction of the property. You may have availed of the home loan and would have started paying EMIs on the same but according to Section 24, if the property is still under construction, then the exemptions mentioned above, of Rs 1.5 lakh and Rs 1 lakh respectively, cannot be deducted from the income tax payment during construction. These will only be factored in the form of five equal instalments from the year in which the property was constructed. In other words, the interest that you pay on the home loan during the pre-construction phase can actually be availed for deduction in these five equal instalments. What happens if you sell the same property within five years from which it was completed? In that case, there are tax implications. The deductions that you enjoyed based on the principal amount will be reversed and in fact will be lumped together and treated as your income of the year in which you sell your property. What happens if you have paid interest on the loan instalments that you took for this property? You can claim the benefit of interest, but only from the year in which the construction was completed. What about deduction of tax on the interest paid during construction period? You can avail of this, for the accumulated interest that you paid before the year of completion of the house. In case the property is occupied, then the deduction is limited to Rs 2 lakh. If construction is not completed within three years of taking of the home loan, the deduction claim whittles down to Rs 30,000. What is capital gains exemption? If you sell a property and are using the money to fund a self-constructed house, you can claim capital gains exemption on this sale as long as the property is constructed within three years of the sale of the asset. Home loans for under construction property Taking a home loan for an under construction property is very beneficial, although a strict timeframe is imposed. The person who is availing of the home loan can defer the deduction of the interest portion that is paid during the pre-construction phase. Home loans are structured in such a way that each instalment of payment by the bank will coincide with proof of another level of completion of the project by the developer. These tax benefits extend only to residential properties. In terms of tax benefits, Section 80 C gives tax benefit for the stamp duty and registration fee. These are the exemptions that can be availed in terms of a self-constructed house and if the strict deadlines and time frames are factored in, they can work to your advantage.