Home Loan Pre-EMI Tax Benefit for Under Construction Property: Finance Trading Times

Home Loan Pre-EMI Tax Benefit for Under Construction Property

Continuing our series on home loan articles, in this article we discuss the case of Tax Benefits on Home Loan Reapyment for under construction property and pre-EMI. Previous article was on Tax Benefit on Principle Repayment of Home Loan.

Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example: Home Loan
EMI starts in Apr, 2010
Possession of Home Received in Jan, 2012 (next financial year with respect to EMI starting year)

Monthly EMI in pre-possession year, say 20,000
Annual EMI for 1 year in pre-possession = 2,40,000
Principal part of EMI in pre-possession 60,000
Interest part of EMI in pre-possession 180,000
20% of the Interest part of EMI in pre-possession period: 36,000

EMI after possession 20,000
Annual EMI after possession 240,000
Principal part of EMI after possession 60,000
Interest part of EMI after possession 180,000

Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page

Now because of this pre-possession period, tax benefit on home loan changes.
During the pre-possession period, you can claim tax benefit ONLY on the PRINCIPLE component under section 80C. So as per the above example, in the financial year 2010-11, you can claim tax benefit only on the 60,000 Rs. you paid for the principal component. You CANNOT claim anything for the interest part during the pre-possession period or the PRE-EMI period.

Come next financial year i.e. the year in which you get the possession, now you can claim for both Interest as well as Principal amount repayment.
Hence, in the year 2011-12, you are paying interest of 180,000, so you can claim for the maximum tax benefit upto the limit of 150,000.
For the principal part of your home loan after possession, same rules apply for the section 80C (collective tax benefit of Rs. 1 lakh).

Then, how about the interest you repaid during the pre-emi period?
Although you cannot claim any tax benefit for the interest paid on your home loan during the pre-EMI period, you can still avail some tax deductions once you get the possession of your home.
As per the rules, once you get the possession, you can get tax rebate for the amount of interest you paid during the pre-EMI period, but in 5 annual installments. i.e. each year you can claim a maximum of 20% or 1/5th portion of the pre-EMI interest component payment on your home loan.

However, there is an additional condition attached to claiming this pre-EMI tax benefit after getting the home possession. That is, your total interest component (Current Year post-possession interest component + Previous year's 20% pre-EMI interest component) cannot exceed 1.5 Lakhs limit.
Hence, in the example above, since post-possession, your Interest part is 180,000 and 20% of your pre-EMI interest part is 36,000 taking the total to 216,000. You can still only claim for a maximum of 1.5 Lakhs only for interest.

If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page

Joint Home Loan Tax Benefits

Scenario 6: Joint Home Loan

Scenario 3: Home Loan taken and Possession of home received. But currently NOT staying in the loaned Home: This might happen in case you purchase a home on loan, get the possession, but then due to say work related requirements you shift to another city.
Hence, you can leave your home vacant or put it on rent.
The conditions in scenario 1 applies.
But please note in case you put the house on rent, you are earning rent from it. That rent should be added to your taxable income, apart from the tax benefits you will get from home loan as mentioned in scenario 1 or scenario 2.

Scenario 4: Can I claim both Home Loan Tax benefit and HRA (House Rent Allowance)?
YES. That is possible. Many individuals believe that they cannot claim HRA and Home Loan Tax benefits at the same time, even many corporate office's finance and payroll department do not accept such claims from the employees, but as per the IT rules, it is very much possible to claim both HRA and Home Loan Tax Benefit. However, again there are multiple scenarios depending upon which one can and cannot claim both HRA and Home Loan Benefit.
To explain that scenario, we encourage you to check our dedicated article HRA & Home Loan Tax Benefit can be Claimed Together
But before taking a decision on Home Loans, do check the benefits of going for a Joint Home Loan, where your tax savings can be multi-folds, depending upon the no. of applicants. Although there are some disadvantages also, see the next article on Joint Home Loan Tax Benefits
Have Comments or Questions? Please post them as comments using "Post our Comments" link below. Your queries will be responded for free in 24 hrs!

15 Comments: Post your Comments

shravan kumar said...(on 12 July 2011 at 07:36 )  

Dear Sir,
I was alloted a property by g.noida authority in 2008. I had to pay 30Lac in 8 six monthly installments with interest 11%.
Each 6 monthly installment to noida authority was 3.5 lac
To support it, I took home loan from SBI, and had to pay only interest to SBI till possession which will be this year.
Now once i take possession, my house will remain vacant as the area is not livable and also i work in a different city.
Now my quesiotn:
1. can i get tax rebate on interest paid before possession to GNIDA and also to bank?
2. Will there be a limit of Rs 1.5 Lac applicable or no limit as the house is vacant.

FT Times Correspondent said...(on 12 July 2011 at 22:08 )  

Hi Shravan,

Thanks for your query.
To answer your questions
1) No, during the pre-possession period, you CANNOT get tax benefit on interest part. You can get tax benefit on interest only after you get possession. During pre-possession, you can get tax benefit only on principal part, if some EMI portion has gone into that.
However, please note that even for the principal part, there is a collective limit of 1 Lakh under section 80C. Please check Complete List of Qualifying investments under section 80C. Remember that it is COLLECTIVE SUM with a limit of 1 Lakh on all components.

2) Once you get possession, irrespective of whether the house is occupied or lying vacant, you can claim tax benefit on interest part also with the limit of 1.5 lakhs.
But in case of your house lying vacant, you are still required to pay tax on a notional rent. See details in HRA & Home Loan Tax Benefit can be Claimed Together

Dont hesitate to contact us again in case of any more issues. However, please note that the info above is based upon our general understanding and might change as time passes by. Please consult a qualified tax consultant for a detailed answer

Ankur said...(on 17 August 2011 at 02:09 )  

Good day

I am having a home loan for an under construction flat in which my brother is co-applicant in both property and loan account.
EMI are being payed from my account. How can my brother get the tax benefit.
The certificate of interest from bank includes my brothers name but is it required for my brother to pay in loan account or transfer money to the account from which EMI is paid to get tax benefit.
I am aware of the fact that during pre-possession, I can get tax benefit only on principal part with a collective limit of 1 Lakh under section 80C.

Thanks & brgds
Ankur Gulati

Ankur said...(on 17 August 2011 at 02:10 )  

Good day

I am having a home loan for an under construction flat in which my brother is co-applicant in both property and loan account.
EMI are being payed from my account. How can my brother get the tax benefit.
The certificate of interest from bank includes my brothers name but is it required for my brother to pay in loan account or transfer money to the account from which EMI is paid to get tax benefit.
I am aware of the fact that during pre-possession, I can get tax benefit only on principal part with a collective limit of 1 Lakh under section 80C.

Thanks & brgds
Ankur Gulati

FT Times Correspondent said...(on 17 August 2011 at 05:00 )  

Hi Ankur,

Thanks for your question. FTTimes will be happy to help you on your query.

Co-applicant is different than Joint Loan applicant.

Usually, Home loan provider banks take a name of co-applicant for 2 reasons

1) Security : In case the primary loan seeker defaults, the co-applicant can be approached
2) Nominee: In case of death of the primary loan seeker, the co-applicant is approached

Now, the question is whether your brother is a co-applicant only or a real joint home loan applicant?
If he is only a co-applicant, he cannot get any tax benefit.
If he is joint home loan seeker, then the property should include his name (along with yours) in the registration and all documents. Secondly, if it is real joint loan, then the bank usually asks for a percentage of contribution from both (or all) loan seekers - like 50-50 or 60-40 or 90-10. The interest certificate which is issued by the bank at the end of the year contains the clear info for all joint home loan applicants and their share.

Now, to answer your question better, please check for all the cases mentioned above and let us know what is the status of applicant for your brother.
Dont hesitate to follow-up further.
See more details on : http://www.finance-trading-times.com/2011/06/2245-home-loan-tax-benefit.html
This info is based upon the general details available as of this date. Please consult a financial/tax expert to get precise answer specific to your case

Ankur said...(on 18 August 2011 at 05:36 )  

Thanks
My brother is just a co-applicant in the loan account and his salary was not clubbed at the time of calculating the eligibility for loan.
He has his name in the property as co-applicant.
The provisional interest certificate available through internet banking gives details of all applicants but there is no mention of share/ percentage of contribution as other applicants are not joint loan seekers.
Is it possible that my brother not being a joint loan applicant can still avail home loan tax benefit either by paying a part of emi from his salary account or by transferring money into the account from which I am paying EMI.
Brgds
Ankur

FT Times Correspondent said...(on 18 August 2011 at 23:35 )  

Hi Ankur,
Your response and the exact situation seems to be unclear.

When there is a joint home loan by 2 (or more applicants), then all the property registration documents and the home loan document from the bank clearly have the names of both as "owners" (not co-applicant).

You mentioned that "He has his name in the property as co-applicant" and you are also saying that the bank interest certificate "there is no mention of share/ percentage of contribution as other applicants are not joint loan seekers" - these two statements are bit contradictory.

My questions are:
- Does the property registration document contain his name as a joint owner of the property?
- Has your brother signed the property registration document (along with you) at the registrar's office?
- If yes, then why has the bank allotted loan only in your name?

If your brother is a joint owner of the property, then his name should appear along with you in all property document as well as loan documents.
To me, it appears that your brother's name is just a co-applicant (not a joint owner). But please respond with the answers to the above questions for me to assist you better.

This article contains precise details aboue Joint Home Loan status : Joint Home Loan Tax Benefits

This info is based upon the general details available as of this date. Please consult a financial/tax expert to get precise answer specific to your case

Sunil said...(on 12 September 2011 at 04:27 )  

Hi Sunil Here,
We are planning to take home loan for home renovation which is in my fathers name and he is retired. I am planning to put my name as a co-applicant for home loan, so can I get Tax benefit on that loan.pls suggest and how to claim for that.

FT Times Correspondent said...(on 13 September 2011 at 22:50 )  

Hi Sunil,

Thanks for your question to FT Times. We appreciate your patience.
Please note that your case is that of "Home Improvement Loans" and good news is that loans taken for home renovation qualifies for tax benefits.
However, there are 2 limitations -
1) Only the interest portion of the Home Improvement Loan qualifies for tax benefit. The principle portion repayment amount does not provide any tax saving benefit.
2) Tax benefit can be availed only by the owners or co-owners (joint home owners)

Please note that co-applicant is different than joint home owner. There can be a co-applicant of a home loan, but he/she cannot USUALLY get tax benefit.
I believe the house is in the name of your father and you are only going to be a co-applicant for the home renovation loan along with him. Since he is still alive, that means your case is not of inheritered property. Therefore, the tax benefit on this home loan can only be claimed by your father and not you (as a co-applicant)
If you also want to claim tax benefit on home loan, then it will be advisable to get your name also onto the property registration document along with your father, which will make you the joint owner of your home.
However, that will involve some cost, which you will have to check in your particular case depending upon your property valuation. If the cost of getting your name added as a joint owner is significantly less than the tax benefit you will get on the interest payment on your home improvement loan, then you should go for it before applying for the home renovation loan.
If you are taking this route, then also note that you and your father will have to inform the bank about the proportion in which you both are taking the loan - 50-50, 60-40, 80-20 and so on. Make the calculations which will give you the maximum tax benefit, as your father is now retired.

Please check our article Tax Benefits on Home Improvement Loans: Home Renovation Loan Tax Benefits

The above information is based upon the general understanding at the time of writing the article. Readers are advised to check with a certified tax consultants for their particular cases, as rules and regulations keep changing from time to time and each case is different for different individual

Anand said...(on 21 September 2011 at 05:43 )  

Hello Sir,

I am living in own house (still my I am paying EMIs) and planning to move to a rented house as it is bit difficult to commute daily to my office (as it is almost 20KM away).
But I am planning to keep (for another one and half years) my dependents (father, Mother and brother) in my own house as my brothers college is close by.
Coming to the income tax part, I understood that I am eligible for both HRA claim (for rent house) and tax benefit (for my own house) as my dependents are staying.
My question is what is the upper limit on Loan interest (is it the full interest i pay or 1.5Lacs) that I can claim for my own house in this case?

Best Regards,
Anand

FT Times Correspondent said...(on 21 September 2011 at 21:49 )  

Hello Anand,

Thanks for your question. FT Times will be happy to help you with your query.

To answer your question, the upper limit on Home Loan Interest is capped at the maximum of 1.5 Lakhs. You cannot claim tax benefir on more than 1.5 Lakhs irrespective of the amount of home loan interest you repay.

See more All Home Loan Articles

If you are satisfied with the response, please help share this knowledge. Share this article link through Facebook, Twitter, Google +1 or Google Buzz, through the buttons on your left.
Do no hesitate to contact us in case you have any more questions.

Thanks
FT Times

Abhishek said...(on 3 November 2011 at 05:08 )  

Hi, What is the meaning of possession in real legal sense? I got the handover of my flat, have started staying there - but the flat is still not registered in my name. can I still claim IT benefits in the ongoing year?

FT Times Correspondent said...(on 3 November 2011 at 06:41 )  

Hi Abhishek,

Thanks for your question.
As far we understand, you get a "Possession Letter" from the builder with a date mentioned on it.
That entitles you to take possession of the flat effective that date.
Usually, employers ask the employees to submit a copy of possession letter to claim tax benefit.

Dont hesitate to write back in case you need more clarifications.

Thanks
FT Times

Shobhit said...(on 11 January 2012 at 23:12 )  

I have two queries.

1. I have taken a home loan in December 2010, with my spouse as co-applicant and she is also co-owner as her name is there in the registration. The flat is still under construction, and the loan is partially disbursed. However, we have paid some extra prepayment in FY 2011-2012, along with the regular pre-EMI (only interest on the outstanding). Is this extra-prepayment eligible for tax exemption under 80C (when loan is half disbursed, and the house is under construction)?




2. The bank statement of loan payment has my spouse's name as co-applicant, but didn't mention anything about percentage sharing. Please let me know how I can get the sharing fixed, as my spouse is clearly a co-owner and a co-applicant.

Thanks in advance for the answers.

Gopal

Hi Gopal,

Thank you for contacting FT Times. We'll be happy to help you.


With regard to your query no. 1, since the house is still under construction, it is the pre-EMI period.
During the pre-possession period, you can claim tax benefit ONLY on the PRINCIPLE component under section 80C. Please note that the interest component cannot be claimed for tax benefit under pre-emi or under construction period.
See article http://www.finance-trading-times.com/2011/06/2245-home-loan-tax-benefit.html

Please note that all banks use different terms with different meanings. A co-applicant need not necessarily mean co-owner for one bank, but may mean a co-owner by the other bank. Similarly, Co-owner may be different than a joint owner from one bank to the other.
For q. no. 2, is your spouse regularly paying part of EMI (or pre-EMI) from her bank account? Does she have a regular income from which the EMI/pre-EMI is regularly getting paid?
If not, then she cannot claim any tax benefit. You have 100% ownership of home loan.
If yes, then the percentage sharing will be in the proportion of her EMI part and your EMI part.

Please dont hesitate to contact us if you need any more info.
Thanks
FT Times
Although FT Times has provided the above info, it is based upon general understanding. You acknowledge that situations vary from individual to individual so Please consult a qualified tax expert on the same, before taking a final call

Gunjan said...(on 10 February 2012 at 03:24 )  

Can I claim the pre-possession interest paid on my house after I take possession and sell that house. Since I am claiming the interest exemption for the period for which I was holding the house.

Gunjan

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