Planning to build your own house? Know home loan eligibility, tax limits, and EMI rules

From the phrase “roti, kapda aur makaan”, it is evident that makaan is one of the three basic needs of a person. A person allocates a significant portion of his present and future savings to securing a roof over his head. Earlier, people used to build a house with their retirement funds, but nowadays, young people can realise their dream of owning a house with the easy availability of home loans in the prime of their youth.

In this article, we cover two aspects of home loans for house construction. First, the feasibility of availing a home loan for the construction of a house. Second, the tax benefits that are available for a home loan used to construct a house.

Home loan eligibility

As far as availing a home loan is concerned, the lenders treat a loan for a ready-to-move-in house property and a booking of an under-construction property on the same footing with regard to eligibility, tenure and rate of interest. However, for a loan to an under-construction property, disbursements occur in stages linked to the construction’s progress. Many lenders are willing to lend for such properties.

In the case of the self-construction of a house on your own plot of land, you have a relatively smaller number of lenders willing to lend you. For self-construction, the buyer can opt for a composite loan that covers the cost of the plot and construction. The lender will disburse you only after you have fully contributed your share. The lender releases money in tranches based on the certificate provided by your architect or civil engineer. You also have to submit photographs to support the stage of construction completion. In some cases, the lender deputes its own engineer/architect to verify the stages of completion of the construction instead of relying on the certificate furnished by you.

Repayment of such loans in the form of EMI begins once the lender has fully disbursed the loan, which normally coincides with the completion of construction. Please note that it is not necessary for the EMIs to start only after the construction is complete. Until your regular EMIs start, you may have to pay interest on the money already disbursed by the lender. This is known as pre-EMI interest.

Tax Provisions

You are entitled to claim an amount up to Rs. 150,000 under Section 80C for principal repayment of the home loan, etc., along with other deductions like ULIP, PF, PPF, ELSS, NSC, etc. This loan must be for the construction or purchase of a residential house and obtained from banks or Housing Finance Companies.

In case you have already started paying EMI, which includes interest and principal, before completion of the construction, you cannot claim any deduction for principal repayment made before the construction is completed.

In case you sell such property within five years from the end of the financial year in which possession of the house is taken, all the deductions claimed earlier on such repayment are reversed and treated as income of the year in which you sell such property. This deduction for principal repayment is available only under the old tax regime.

In addition to the deduction for repayment of the home loan under Section 80C, you are also allowed to make a deduction under Section 24 (b) for interest paid on money borrowed for the construction, purchase, repairs, or renovation of the house. You can claim the benefit for payment of interest from the year in which the construction of such property is completed. However, unlike principal repayment before completion of the construction, you do not lose your right to claim the interest paid before completion. You are allowed to claim the accumulated Pre-EMI interest paid till the year prior to completion of the construction in five equal instalments, along with your regular interest for the year beginning from the year in which the construction gets completed and possession obtained.

You can claim interest up to ₹2 lakh under the old tax regime for a maximum of two self-occupied properties taken together. This claim of ₹2 lakh is reduced to ₹30,000 if the construction of the house is not completed within five years from the end of the year in which this loan was taken. If the house is let out, you can claim full interest on such a loan, but a loss up to ₹2 lakh under the house property income is allowed to be set off against other income under the old tax regime.

If you opt for the new tax regime, no deduction for interest is available for self-occupied property. You are not allowed to set off any loss under the house property head against other income. So, interest on rent up to the taxable amount can be claimed under the new tax regime for let-out properties.

It is interesting to note that there is no provision for reversing the tax benefits availed under Section 24(b) if the house is sold before completion of five years from the end of the financial year in which it was completed.

This way, you can see that the construction of a house gives you various benefits, but the various time limits have to be met so that you do not lose the benefits available for the construction of a house.

(Balwant Jain is a tax and investment expert.)