Home loan for under-construction property: Will I get income tax benefits?

I wish to obtain a home loan for booking an under-construction property. Can you please guide me on how to go about it? When would I be able to get the tax benefits for the home loan for an under-construction property?

The first and most important thing you should ensure is that the project is approved by some of the big lenders like ICICI, HDFC, or SBI before you decide to go for that particular project. This will ensure that prime facie technical due diligence has been carried out by their team of competent persons which is not so possible for an individual to carry out economically.

Please note that the technical due diligence does not ensure that there will not be any delay in the completion of the project beyond the time limit promised. Under no circumstance you should make full payment for the property even if the developer is offering you a huge discount on the purchase price. The payment should be made based on the progress of the completion of construction. 

The lenders would normally not agree to the full disbursement of the home loan at the beginning and would disburse the loan amount which is linked with the progress of construction. It is always advisable to go for a construction-linked plan for the property to ensure that your exposure is in proportion to the stage of completion of the property rather than disproportionate.

For a home loan taken for under-construction properties, the bank will charge you interest on every disbursement made to the builder till regular EMIs start. This interest is called Pre EMI. Pre-EMI is the simple interest payable on a home loan taken for an under-construction property where the loan disbursement is linked to the stage of construction. This amount of Pre-EMI does not have any principal component and is towards interest only on the amount of loan disbursed to date. The actual loan repayment, as regular EMI, will normally start only when the entire loan amount is disbursed to the builders which generally coincides with completion of the construction.

Some lenders may allow you to start paying EMI's separately for each tranche (portion) of the loan disbursed. Whatever option (EMI or Pre-EMI) you may have selected; the repayment will be based on the actual amount disbursed to date.

As far as tax benefits are concerned, you will not get any benefit during the construction period for servicing the home loan. Tax benefits for interest and loan repayments begin only from the year in which the construction is completed and possession is taken. The tax benefit in respect of Pre EMI interest can be claimed in five equal instalments beginning from the year of possession together with regular interest for the year within the limits prescribed.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on Twitter.