Buying a Property? Beware of these tax bloopers- Home Loan Taxation

Buying a property? Beware of these tax bloopers

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Buying a property? Beware of these tax bloopers

home loan tax benefits


With festivals round the corner and the Reserve Bank of India slashing repo rates – at which the central bank lends to other commercial banks – builders have been doling out offers to lure home buyers.

“Buy home now and pay later,” Get car on the first 100 bookings,” “Bag 4 gm gold coin with your home purchase,” and such other deals call out the buyers. But most of these baits are being offered on under-construction properties.

In the past too we have seen how builders have faltered on the promised possession dates. The delay in possession not just leads to higher pre-EMI cost for you or existing rental wastage, but also has tax implications on the way you claim income from house property.

If you really like a project and are looking to invest in it during the under-construction phase and avail the discount on prices then the tax aspect of the investments need to be understood. Here are some tax loops related to home loan taxation, which is a significant benefit of Rs 2 lakh per person under section 24(1), that you should avoid getting entangled in:


Principal disallowed till possession

When you purchase a flat during the under-construction phase using a home loan, then you won’t be able to take advantage of the enhanced section 80 C deduction limit announced in the Union Budget presented in July, 2014. You cannot claim the principal amount that you have been paying on your home loan until you get possession of the flat. Though the interest portion can be claimed, there is a unique way in which it can be claimed.

You need to divide the total interest paid toward the home loan during the construction period in five equal parts. Each of these parts can be claimed over five years after the date of possession.

So, if Arun buys an under-construction property in June 2014 and gets possession of the flat three years later after shelling a total interest of Rs 5.5 lakh. He can claim Rs 1.10 lakh each year for five years as loss from house property.

We also need to calculate the limits for claiming interest keeping in mind the overall ceiling of Rs 2 lakh. So, after getting the possession Arun will also have the interest on home loan apart from the pre-EMI interest. After clubbing both of them he can just claim Rs 2 lakh as deduction under section 24b, if he has just one house property. He will have to give up on the total interest to be claimed – for under construction phase + existing year’s interest – that exceeds the limit of Rs 2 lakh.



Lower tax deduction

The tax benefit of Rs 2 lakh on interest paid on home loan is available for Arun only if the building he has booked a property in is constructed within three years after he borrowed the home loan. However according to the amended rules in Budget 2016 this limit of 3 years has now been extended to 5 years. Hence now the interest deduction of Rs 2 lakhs can be claimed even if you get the possession of the house within 5 years.

Instead of getting the possession by June 2019, if the project gets completed by 2021 then he would suffer a big loss on the tax benefit due to a situation beyond his control. He can claim a deduction of only Rs 30,000 and not Rs 2 lakh each year as per section 24 (b) of the Income Tax Act.

Research firm Laises Foras says, there are 6.3 lakh borrowers affected by this minute, but highly impactful rule under the Income Tax Act as their homes have been delayed. For those who pay interest of Rs 2 lakh or above each year a delay in project beyond three years would cost them a tax deduction of Rs 1.7 lakh or more each year.

The loss ratio would decline over the term of the loan, when the interest portion reduces and the principal amount increases.


Tax benefit can be reversed

If you find a better opportunity in another city and plan to sell your house, be mindful of the years you have been servicing the home loan for. A sale within five years of getting possession of your flat purchased using loan can lead to a huge tax burden.

We aren’t talking of the capital gains tax you would have to pay on the sale amount. But the reversal of tax benefit that you have accumulated over five years. The deduction on account of principal repaid under home loan (upto 1.5 lakh under Section 80 C) is provided on the simple premise that the home shouldn’t be sold within five years.

The five years aren’t calculated from the date of possession, but from the end of the financial year in which you got the possession of the home. So, if Arun got the possession in December 2014, then he cannot sell the house till April 2020 (five years after March 31, 2015) to continue claiming the tax benefits.

Reversal of tax benefit would add a wholesome income into the year of sale thus leading to increase in tax bracket too.


Escape the tax axe

There are however by which you can save your foot from falling into the tax deduction denial fire. Make an appeal to the assessing officer about the delay in construction of project. There have been cases in the past where the request has been accepted.

If you have sold a property before the completion of five years and the reversal of tax benefit looms then go back to your investments file and find the other 80C investments you have made in those five years. Before reversing the claim investments made under life insurance, ELSS, PPF, EPF, NPS, tax-saving FDs, etc, can be taken into account. If your investments round up to Rs 1.5 lakh, even though they weren’t claimed in that particular year then you need not reverse the tax benefit.


H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for E filing their Income Tax Returns Online.

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H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.


  1. Manish says:

    Hi Team,

    I took a home loan in FY 2011-12 from SBI. My flat is still not ready for possession till March, 2015. Hence, I believe my tax deduction goes down from 200,000 to 30,000/year. I want to take complete benefit of the interest part. Should I shift my loan to different bank? Will that work? In that case, can I claim interest paid till now to SBI in 5 years down the line?

    Kindly advice.


  2. Nagendra Hasilkar says:

    Hi Team,

    I’m trying to find some article relating the tax implications arising out of capital gains/losses as a result of trading in share markets. Could you please throw some light on the following points:
    1) If a salaried person invests in share market (short term &/or long term), how does he arrive at his total tax liability at end of the financial year.
    2) What reports do we need from the brokerage house to calculate the tax implications.
    3) Is advance tax clause applicable for employees doing occasional share trading to complement their income.

    Any information related to these points would be really helpful.

    Nagendra Hasilkar

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