Sushil Kumar, 35 and Reena Gupta, 33, Mohali-based software professionals have been residing at rented accommodation and contemplating to buy a new house for their own residence. Amidst so many choices in the real estate market, couple has to take the most important decision as they whether to go for a ready-to-move or an under construction one. Though the process of buying in the both cases is similar; there are certain issues typical to buying a house from its later owner. If we consider primary factors such as location, type of property, neighborhood and size are the same in both cases, a ready-to-move house costs would get more, but you don’t have to wait to live in it and so can save rent as well as tax benefits. On the flip side, an under-construction house costs is less, but you would have to end up paying interest on home loan without getting any tax deduction until getting the possession of house plus outgo rent for your present accommodation which is a major deterrent.

Relevant Tax Laws under-construction property

Any under-construction property does not qualify for renowned housing loan tax deduction up to Rs 1.50 lakh under section 24(b) of the IT Act till the house is completed within three years of the end of the financial year in which loan has been disbursed. However, principal paid on under-construction property is eligible up to Rs 1 lakh under section 80C. With project delays a norm rather than an exception, a large number of buyers could not be able to become eligible for the annual Rs 1.50 lakh tax deduction on the interest payment.

But, relevant tax laws allow unclaimed interest tax deduction in the year of the completion of property within stipulated period as one-fifth of pre-construction interest paid in the previous financial years. It can be added to the interest paid that year; the rest will also be added over the next four financial years but subject to maximum overall limit of Rs 1.50 lakh per annum. However, deduction on pre-construction interest does not make much sense when the loan is in a big amount. This is because the current year’s interest will eat up all over the tax deduction limit and no room is left for previous year interest paid. So, a big loan for an under-construction property would get more paid as you lose the tax benefits on earlier years’ interest payments that you make before the property is get ready.  But, you can still claim the house rent allowance deduction during the period, if you are staying on rent.

weigh

Weigh the cost outgo between two similar properties

Let’s take two similar properties, one ready for possession and other to be ready in three years but its cost is 25% less from earlier one.

Particulars

Ready-to-move

Under-Construction

Cost   Price

40,00,000

30,00,000

Price   inclusive Service Tax*@ 3.09%

40,00,000

30,92,700

Down   Payment

10,00,000

10,00,000

Home   Loan

30,00,000

20,92,700

Annual   EMI (@10% interest for 20 years)

3,47,408

2,42,340

Interest   component of EMI

2,97,766

2,07,711

Annual   rental outgo

1,00,000

Tax   Savings on interest paid @ 30% Tax

45,000

Net   annual outgo in the first 3  years

3,02,408

3,42,340

As you can see on the above table, you would shell out more approximately Rs40,000 annual outgo in the first three years, if you choose to buy an under construction property , though its price is less than 25% from the ready-to-move property.

Hence, it may be best to prefer a ready-to-move house over an under-construction one.

 Service Tax*

When a builder is selling a property in a group housing project before it is ready for occupancy, a service tax of 12.36% will be applicable on a portion of the price. However, there is no such tax if the property‘s carpet area is up to 60 square meters. For properties worth up to Rs1 crore or not exceeding 2,000 square feet in area, the service tax is applicable only on 25% of the price. So the effective service tax rate is 3.09%. You do not have to pay this tax if the property is ready for possession. Also Read: Getting prepared for Owning a House Property

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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