With festivals round the corner, builders are enticing home buyers with deals like ‘buy now, pay later’, ‘no VAT/service tax on early bookings’, and so on. Most of these offers are mainly on under-construction properties.
Housing projects are being delayed because cash-strapped builders are unable to complete construction. The delay in possession leads not just to higher pre-EMI costs or existing rental wastage, but also has significant tax implications for a taxpayer.
A delay in getting possession implies that a taxpayer will not be able to benefit from any kind of tax deduction until the project is completed. Home buyers count on the tax breaks provided to them in the form of deduction up to Rs 1.5 lakh towards principal repayment (included under Section 80C) and a further deduction up to Rs 2 lakh towards interest payment (included under Section 24), presuming it to be the only house and being self-occupied. However, such interest is allowed as a deduction only if the house belongs to the taxpayer during the year. If the house is not complete or possession has not been taken, then the interest paid for the year on the home loan is not deductible.
Nevertheless, such interest can be accumulated till the year in which possession of the house is taken and, from this year, one-fifth of such construction period interest will be allowed for five years. Further, the limit of Rs 2 lakh will operate as a combined limit for the interest of that year plus one-fifth of the construction period interest. Therefore, any delay in receipt of possession or completion of construction of a house results in an increase in the construction period interest, with a greater likelihood of a part of such interest not being allowed for tax deduction on account of the R2 lakh limit in the subsequent year of deductibility.
Further, to get deduction for interest on self-occupied property, the taxpayer must get possession of the property within three years of taking the loan. If the three-year deadline is not met, the deduction benefit reduces to merely R30,000 a year. This restriction will not apply to rented-out property where entire interest is fully deductible.
Additionally, under Sections 54 and 54F, exemption for long-term capital gains is available if the capital gains or the net sale proceeds are reinvested in the purchase of a residential house within a prescribed period. Acquiring an under-construction house from a developer has been held to amount to construction of a house and not purchase by various high courts and, therefore, the time limit of three years applies to such an acquisition. If the construction is not completed and possession not given by the developer within the 3-year period from the date of transfer of the capital asset, authorities may take a view that the taxpayer is not entitled to the benefit of the exemption for reinvestment of capital gains in a residential house.
High courts have, however, taken the view that where a house purchaser has agreed to purchase a house under construction, has fulfilled his requirements under the agreement, including making all payments due by him, but where he has not been able to obtain possession due to default on the part of the developer, the capital gains provisions need to be interpreted in a beneficial manner. In such case, according to the courts, the benefit of the exemption cannot be denied to the house purchaser. The tax authorities, however, may not subscribe to this view and, hence, litigation is likely.
Therefore, delay in possession of an under-construction house could have significant adverse tax consequences for a taxpayer, who has either taken a loan for acquisition of the house for self-occupation or who has sought the benefit of long-term capital gains tax exemption.
The writer is tax partner, EY India. Views expressed are personal