New rules on tax benefits on home loan for delayed property

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Mohan Kumar bought an under-construction flat in January 2013 and took a home loan from a public sector bank to finance this purchase.

He was supposed to receive the possession of his flat within a year. However, there has been a delay on developer’s part and as of now the estimated date of possession is October 2016.

What upset him most was the fact that he was unable to claim tax benefits available on home loan EMI owing to this delay. Today, Mohan is a relieved man.

This year’s budget has brought a huge relief to thousands of people like Mohan who are yet to receive the possession of their property.

Amendment of Section 24(b) increases the possibility of claiming the entire Rs.2 lakh deduction. Let’s look at what the extension of time period under Section 24(b) entails for loan borrowers: What has changed under Section 24(b) of the Income Tax Act? Earlier, Section 24(b) allowed you to claim deductions of up to Rs.2 lakh for repaying interest on home loans taken for self-occupied property (there is no limit on the deductions if the loan is taken for a house let out on lease).

However, this amount comes down to Rs.30000 if developers fail to complete the construction of the house within 3 years of taking the home loan.

Budget 2016 extended the possession period from 3 years to 5 years. Now, you get 2 additional years to receive the possession of their property without having to forego tax benefits.

You can avail tax benefits of up to Rs.2 lakh, irrespective of delay in completion of the project (capped at 5 years).

This amendment applies to both existing and new home loan borrowers.

How does it impact you?

Apart from offering psychological relief (you no longer have to worry about the delay caused in completion of the project. Not for 5yrs at least); the extension of time period allows you to save up to Rs.52000 in total tax payable each year.

Let me explain it to you with the help of an example. If your taxable income was Rs.15 lakh and you don’t receive the possession of the property within 3 years, you could have only claimed Rs.30000 as deductions on interest payment as per the previous guidelines.

The total tax payable in the scenario will be around Rs.2.73 lakh. However, under the new guidelines (effective from April 1), you can claim up to the entire Rs.2 lakh tax deductions, provided the developer completes the project within 5yrs.

The total tax payable in such case will be Rs.2.21 lakh per annum.

Taxable amount under earlier provisions Taxable amount after amendment to Section 24(b) You can use the tax savings to either prepay the loan amount or invest in financial instruments such as mutual funds or fixed deposits.After all, money saved is money earned.

Can the extension of time period solve the borrowers’ problems in entirety?

Although the extension period provides relief to a lot of home loan borrowers, the solution in itself is not a complete one as there is no guarantee that the projects will be delivered within 5 years.

This may in future lead to demands for further extension of time period, which is not feasible as many home loan borrowers (who take loans for constructing their own house property) may misuse the provision to extend the period of construction as far as possible in order to maximize tax benefits.

The logical solution is to stop penalizing home loan borrowers and instead, penalize developers who fail to finish the project on time.

This move would set the right precedent amongst developers, forcing them to avoid causing unnecessary delay in handing over the possession of property to home owners.