There is a tax benefit for taking a loan for the purpose of buying a property under construction but there can be a downside risk to the move too. If the construction is not completed within a specified time period then the expected tax benefits of the interest paid on the loan for such a purchase could be reduced. This provision has affected a lot of people in the past couple of years as a slowdown in the Indian real estate sector has led to properties not being ready in time. Now an extension of the time period for such benefits will help people but what is key is the features that go along with the claiming of this benefit. Here is a look at the issue in detail.
Higher tax benefit
There is a tax benefit when one repays a housing loan and this is usually done through the route of an equated monthly Instalment (EMI). The EMI consists of both the interest and the capital repayment based on the conditions of the loan including the time that has passed since the start of the repayment. The key part is the benefit on the interest front where an individual can get a deduction of Rs 2 lakh per year. There are two conditions that need to be met if this has to happen. The first condition is that the amount has to be borrowed after April 1 1999 and this condition is automatically met because any new loan will fulfill this condition. The other point is that the construction of the property has to be completed within a period of three financial years.
The problem that a lot of people were facing is that when they went and bought property that was under construction there was no guarantee that it would be completed within the three year time frame. In fact the slowdown in the real estate space has led to more projects being delayed and the individual found that they did not get the completed property. This had become a situation where the individual was suffering financially on the tax front too for no particular fault of theirs. The time period has been extended to five years and this additional two years time frame should be a big cause of relief for the taxpayers. It is likely that most projects would be completed within this time frame even if a little delayed and hence this could enable them to get the tax benefit.
End of financial year
One term in the entire process is very important with respect to the calculation of the time period and hence this needs attention. The manner in which the time would be calculated is not five years from the date on which the loan is actually taken. There is a leeway on this front because the exact term that is used in the tax law is that it is five years from the end of the financial year in which the capital was borrowed. This could mean a lot of extra time which could run into months and this is a good thing for the individual. For example if the person has taken a loan in July then the time for the calculation of the five years will start from the end of the financial year which would mean from next March. This can give a lot of additional time which is good for the individual because it will ensure that they do not become defaulters and hence they can claim the higher amount of the tax benefit. This is the key to the process because even a small overshoot of the time period can lead to the benefit being reduced.