Scouting for your dream home? If you are looking to buy a residential property in the current real estate market, you will be spoilt with choice. For instance, Delhi-NCR, particularly Noida, has a wide range of properties to offer. Most of the properties available for sale in the market are under construction, with expected delivery/possession time ranging from a few months to years. However, you also have a good number of homes that are ready for occupation.
Should you buy a ready-to-move house or an under-construction residential property? The decision should depend on tax benefits as well as the effective cost of purchase after including home loan interest cost and the project delay risk factor. Go for a ready-to-move property if buying your first house and, of course, the price is within your reach. When buying your second house, you can choose either, depending on your investment requirement.
Price Tag Difference
In general, a ready-to-move house comes with a bigger price tag compared to an under-construction property. A ready-to-move property allows you to move in immediately on purchase and avoid paying rent along with bank loan interest. An under-construction house comes with a lower price tag, but it also means a waiting period during which you end up paying interest on the home loan and rental expenditure for your accommodation.
When you consider the rental outflow and interest cost incurred during the construction period of an incomplete property, the price advantage of buying an under-construction property might not seem to be huge. Also, a ready-to-move property allows you to enjoy bigger tax breaks (on principal and interest payments) and zero rental cost.
Risk of Delays
Across India, residential properties are getting delayed due to construction issues or funding crunch. Whatever the reason, buying an under-construction property means taking a risk on the actual possession/delivery time. Even if the delivery of a property gets delayed by just 6 months (which is often incorporated as a grace period for delivery timeline), you will end up paying as much as 5% of the total property cost as interest during the delayed period. This delay in delivery of property can escalate you effective cost heavily if the property construction lags behind.
Ready-to-move properties do not have this risk of project delay. You move in immediately and there won’t be any effective cost escalation owing to delays in construction or issues faced by the developer. This delay factor alone can be a big risk negating the advantage of lower price tag for under-construction properties.
Missed Tax Benefits
You should buy your first house as soon as possible in life. Reasons being the savings on the rental cost, security of own house and gain from tax deductions. With an under-construction property, you miss the advantage of saving on rent. In addition, claiming tax deductions is also not easy.
The amount paid as Repayment of Principal Amount of Home Loan by an Individual/Hindu Undivided Family (HUF) is allowed as a tax deduction under Section 80C of the Income Tax Act. The maximum deduction allowed under Section 80C is Rs 1,50,000. This tax deduction is available on a payment basis, means during the financial year the actual payment is made. The amount paid as Stamp Duty & Registration Fee can also be claimed as a tax deduction under Section 80C (even for those who have not taken any home loan).
However, this tax deduction for principal amount repayment of home loan is allowed only after the house construction is complete and the completion certificate awarded. No tax deduction for principal amount repayment of home loan is allowed during the years property was under construction.
The interest paid for a loan on the first home is eligible for deduction up to Rs 1.5 lakh under Section 24(b) of the I-T Act (for the second home, the entire interest payment can be deducted from the income that is earned from it). The interest paid on home loan when the property is under construction can be deducted in five equal instalments after the property is ready. However, to claim this tax deduction for home loan interest on under-construction property, the construction must be completed within three years of the end of the financial year in which the loan has been disbursed.
With huge delays in construction of properties by developers, a large number of buyers are not eligible for the annual Rs 1.5 lakh tax deduction on interest payments.
Home Loan Tax Benefits
Let’s assume you bought an apartment in August 2014 that was delivered in August 2016. Also, the first home loan amount was disbursed in September 2014. In this scenario, the property was constructed within three financial years (2014-15, 2015-16 & 2016-17) of the loan being taken.
For April-August 2016, the interest paid will be added to the interest paid during the financial year. Both principal and interest deductions will be available for 2016-17, within the respective tax deduction limits.
The interest paid during the construction period of the property in the previous financial years will also become eligible for tax deductions. Starting from the financial year your property was delivered, you can claim the pre-construction home loan interest as a deduction over five financial years. One-fifth (1/5) of the pre-construction interest will be added to the home loan interest paid that year. The rest (4/5) can also be added to the home loan interest head over the next four financial years. However, the Rs 1.5 lakh limit for the home loan interest deduction amount is inclusive of pre-construction interest. If the home loan amount is hefty, there won’t be much benefit of pre-construction interest as your current year’s interest and principal payments will alone exhaust the tax deduction limit.
Hence, buying an under-construction property with a big loan amount (with annual interest cost of Rs 1,50,000) means you will not be able to get the tax benefits on principal and interest payments before the property is ready. However, you do get to claim the house rent allowance deduction during the period if you are staying on rent.
Service Tax on Property
When buying an under-construction property, the existing rules require a service tax of 15% (including Swacch Bharat Cess & Krishi Kalyan Cess) be levied on a portion of the total property price.
Ready-to-move properties do not attract any service tax. So, you end up saving a significant amount when buying a ready house. No service tax is applicable even for under-construction properties where carpet area is up to 60 square metres.
For under-construction houses worth up to Rs 1 crore or up to 2,000 square feet in area, the service tax is applicable only on 25% of the total price. So, the effective service tax rate is 3.75%. For premium properties beyond the earlier mentioned criteria, the service tax is calculated on 30% of the property price.