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Tax Exemptions on Taking a Home Construction Loan

Tax Exemptions on Taking a Home Construction Loan

You don’t buy a house every other day. Truth be told, it is one of the most critical purchase decisions of your life. And as such, you should not settle for a mass-produced, pre-constructed property. Instead, you should have your house built exactly the way you want.

Ready-to-move-in properties generally overstate the cost of materials used and include many hidden expenses that drive the price up significantly. But when you are making decisions about the construction process, you can buy the materials you want, and keep the cost in check. What’s more, these days you can easily avail housing construction loan at attractive home loan rates.

Another benefit of taking a construction loan for building your home is the following home loan tax exemptions you will become eligible for.

Section 24

Under Section 24 of the Income Tax Act, you can claim deductions on the interest component of your home construction loan. In the case of self-occupied property, the maximum deduction allowed is Rs. 2 lakhs.

But, you can claim this deduction only if you complete the construction of your property within five years of taking the loan. Otherwise, you can claim a deduction of Rs. 30,000. If the property in question is not self-occupied, then regardless of the completion status, the amount which you can claim as an exemption is not subject to any limits.

Before taking a loan to avail this exemption, it is ideal to calculate your home loan eligibility online.

Section 80C

Under this Section, you can claim deductions on the principal component of your home loan for construction. Once the construction of your property is over, you can claim a maximum deduction of Rs. 1.5 lakhs.

However, if you sell the property within five years from the date of possession, these benefits will be reversed i.e. the amount you claimed as a deduction, will be added back to your taxable income for the year in which the sale is made.

To qualify for this tax exemption, avail of housing finance after figuring out your eligibility with the help of an online home loan eligibility calculator.

Section 80EE

If you are a first-time homebuyer, you can claim an additional deduction of Rs. 50,000 on the interest component of the house construction loan. You can claim this deduction every financial year until you have repaid the loan completely.

However, to avail of this benefit, the loan amount should be under Rs. 35 lakhs and the value of the property should be under Rs. 50 lakhs. Also, the date of sanctioning of the loan must fall between 01.04.2016 and 31.03.2017. You can claim this deduction over and above the exemption of Rs. 2 lakhs under Section 24.

Section 80EEA

Section 80EEA states that if a first-time homebuyer is not eligible for deduction under Section 80EE, he/she can claim an additional deduction of Rs. 1.5 lakhs on the interest component of loan taken for affordable housing between 01.04.2019 and 31.03.2020.

If you are looking to take a loan for housing construction, visit Tata Capital. We offer attractive home loan interest rates and flexible repayment options.

We encourage you to use our online home loan EMI calculator to compare different repayment options and see what works best for you. Our website also provides a home loan calculator to help you figure out the extent of the amount you can avail. To know more, visit our website today.

How to Claim Tax Deductions on Construction Loan Interest 

Section 80C allows taxpayers to claim construction loan tax deductions for stamp duty, registration charges, and the home loan principal repayment, up to ₹1.5 lakh. However, tax benefits on home construction loan repayments are only available from the year you obtain possession of the property. 

Any principal repaid through EMIs before construction is completed is not eligible for the construction loan interest deduction. If the project is delayed and possession is not received as scheduled, both principal and interest-related tax benefits may be impacted. All these deductions can be claimed while filing your income tax returns.

Eligibility Criteria for Construction Loan Tax Benefits 

Construction loan tax eligibility may vary by borrower. In India, those who can claim construction loan tax benefits include those who specifically take loans for the construction of a residential property. 

Additionally, the building for which the loan was taken must be completed within five years from the end of the financial year in which the loan was availed. Finally, home construction tax rules state that any deductions for home loan interest payments can be claimed only once construction is complete.

Documents Required for Tax Deduction Claims 

The documents for tax deduction claims include:

  • Construction proof: Construction proof is required for tax benefits. This will also have to include the property purchase date. 
  • Borrower details: The home loan must be in your name, or you must be a co-borrower to claim the benefits. Proof of identity (Aadhaar card, PAN card, or passport) may also be required. 

These construction loan tax papers must be kept in order. The home loan interest certificate can also be submitted to your employer so the amount can be factored into TDS calculations. 

Tax Benefits Comparison: Construction Loan vs Ready-Made Property 

When it comes to construction loans vs. ready properties’ tax benefits, it’s essential to understand the distinctions among tax-comparison home loan types. The most significant difference is the timing of tax benefits. For ready properties, interest and principal payments can begin immediately upon purchase. 

However, in contrast, construction loan benefits are deferred until possession. While the construction vs. ready-made property tax rules under Sections 24(b) and 80C are similar, construction loans require a longer wait before tax savings kick in.

Common Mistakes in Claiming Construction Loan Tax Deductions 

Incorrect ITR filing is one of the most common construction loan tax mistakes people make. This could be entering incorrect figures, missing the interest certificate, or not having the required documents ready. 

First-time buyers should also verify that they meet the eligibility criteria and that there are no errors in tax deduction claims before making a claim. Avoiding mistakes in home loan tax benefit applications is crucial and could be the difference between you getting your deduction or not. 

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FAQs

Is interest on construction loan tax deductible in India?

Yes, interest on construction loans is tax-deductible in the country. However, this applies only after construction is complete, and not during the construction.

How much can I deduct under Section 24 for construction loan interest?

 

Under Section 24(b), construction loan tax benefits of up to ₹2 lakh per year can be claimed for a self-occupied property if the construction is completed within the correct timeline.

Can I claim Section 80C benefits on both principal and interest?

 

No, Section 80C applies only to principal repayment and specific charges, while construction loan tax benefits for interest deductions must be claimed separately under Section 24.

What is the deadline to complete construction to claim Section 24 benefits?

 

To claim home construction loan tax deductions, your construction should be completed within five years from the end of the FY in which the loan was taken.

How does Section 80EEA differ from Section 80EE for tax benefits?

 

The most notable difference is that Section 80EE applies to home loans up to ₹35 lakh, while Section 80EEA covers higher-value loans up to ₹45 lakh.

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