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Property under construction: Tax benefit from principal repayment

The Indian Income Tax Act clearly specifies the conditions under which a salaried employee can claim tax rebate on interest payment for housing loan. Section 24 of the Income Tax Act states that no deduction is permissible on interest payment during the years in which construction of the property is still to be completed. Interest for pre-construction period is eligible for deduction in 5 equal installments (across 5 years) from the year construction is completed.

What about tax rebate on account of principal repayment? When the property for which a loan has been taken is under construction, can an employee claim rebate under Section 80C for principal repayment?

Some payroll managers opine that Section 80C doesn’t explicitly bar the rebate on account of principal repayment when the property is under construction. However, a look at the law suggests that tax rebate on principal repayment may not be allowed when the property is under construction.

The relevant clause under Section 80C is presented as follows. Click here to see the source.

80C. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed one lakh rupees.

(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the previous year by the assessee—

(xviii) for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head Income from house property (or which would, if it had not been used for the assessees own residence, have been chargeable to tax under that head), where such payments are made towards or by way of

(a) any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or

(b) any instalment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or

(c) repayment of the amount borrowed by the assessee from

(1) the Central Government or any State Government, or

(2) any bank, including a co-operative bank, or

(3) the Life Insurance Corporation, or

(4) the National Housing Bank, or

(5) ……………

A close look at clause (xviii) stated above suggests that for the principal repayment to be considered for tax rebate under Section 80C, there should be an income (or notional income) from the house property. When a property is under construction, there is no likelihood of income, and hence under Section 80C there is no provision for tax rebate on account of principal repayment. Only in the year in which the construction is completed can the principal repayment be considered for tax rebate. The same rule is applicable not only for principal repayment but also for stamp duty and registration charges.

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