Purchasing a home is not only a financial endeavour but also an emotional milestone for the majority of Indian families. Though a ready-to-move home is the easiest option, several people have a dream to build a house on their own plot. This provides them with more freedom in terms of design, size, and personalization. To cater to such dreams, banks provide home construction loans, which are exclusively designed for those who want to build a home and not buy one.
Besides the provision of funds, there are also several tax benefits regarding these loans under the Income Tax Act and for prospective homeowners, which make the deal very attractive. Once tax benefits and the role that construction loan interest rates play are understood, a borrower can chart their finances more efficiently
What is a Home Construction Loan?
A home building loan is a credit facility extended to a person who wants to construct a residential property on land. In contrast to a normal home loan, which funds the acquisition of a ready property, a construction loan releases amounts in stages, subject to the progress in construction.
This staggered disbursement helps borrowers spend the money only on construction and also enables them to better manage their repayment. The loan period, eligibility, and interest rate of construction loans are typically aligned with those of regular home loans, but with greater flexibility in line with construction works.
Tax Benefits on Home Construction Loans
One of the biggest benefits of going for a home construction loan is the tax benefits, which help to lower the overall cost. Let us discuss the significant benefits under various sections of the Income Tax Act:
1. Tax Deduction on Interest Payments – Section 24(b)
Borrowers can claim a deduction of up to ₹2 lakh annually in interest on a home construction loan under Section 24(b) of the Income Tax Act.
But the advantage is available only when the construction is completed. The property should be self-occupied for the benefit of the deduction.
If the property is given on rent, there is no limitation on the deduction; the full interest amount can be availed, provided the total loss from house property does not exceed ₹2 lakh in a year.
This section is extremely useful when interest rates on construction loans are high, as tax benefits can wipe out substantial loan costs.
2. Tax Deduction on Principal Repayment – Section 80C
Even home construction loan borrowers are entitled to claim tax deductions of up to ₹1.5 lakh in a year on the principal repayment under Section 80C.
The repayment of the loan is not the only factor that qualifies, but also other investments such as life insurance premiums, Employee Provident Fund (EPF), and Public Provident Fund (PPF).
But the deduction can be claimed only after the construction is over and the possession of the house has been taken.
What it implies is that borrowers have to plan their construction periods well in order to claim maximum tax benefits.
3. Pre-Construction Interest Benefit
Another major benefit is the tax on pre-construction interest. If you are making EMIs during the construction period, the interest you pay during this time can also be claimed.
The total pre-construction interest can be claimed as a deduction in five equal installments, starting from the year in which the construction is completed
This will help borrowers not miss out on tax savings on the amount paid during the construction phase.
Key Considerations for Borrowers
Even though tax savings on home construction loans are enticing, borrowers should consider the following:
- Completion Timeframe: For availing tax deductions, the building should be completed within five years from the last day of the financial year in which the loan was availed. Any delay beyond that can decrease the allowable deduction.
- Correct Documentation: Have proper documents of loan statements, certificates of interest, and documents of possession maintained. These will be required for availing tax deductions.
- Understanding Interest Rates: As interest rates on construction loans are a deciding factor in calculating EMI outflow and tax benefit, the borrowers must compare institutions and select competitive rates. Even a minimal variation in interest rates can result in enormous savings in the entire loan period.
Why Select Grihum Housing Finance?
Grihum Housing Finance understands that achieving your dream home involves not just monetary help but also trust and flexibility. Their home construction loans are tailored to address the specific needs of homeowners, with:
- Competitive rates on construction loans personalized to accommodate various income classes.
- Simple documentation and fast disbursement synchronized with the construction speed.
- Professional advice to assist customers in optimizing tax savings and scheduling repayment.
With Grihum’s customer-first approach, borrowers can now focus on their dream home while we take care of the complexities of finance.
Conclusion
A home building loan is not only a method to fund your home of dreams; it is also an intelligent means of minimizing tax outgo. With a deduction on interest as well as principal repayment, coupled with pre-construction interest advantages, the borrower can save heavily. But knowing rules, monitoring timelines, and selecting the suitable lender offering competitive construction loan interest rates is essential.
With Grihum Housing Finance as your partner, not only do you avail yourself of low-cost financing, but you also make sure that your path to owning your dream home is seamless, tax-effective, and hassle-free.
