How a delay in possession of homes affects loans, taxes

Delays are likely to reduce tax savings and wipe out the leverage advantage of home loans

- Shipra Singh

For many homebuyers, a housing loan is more than a means to acquire a property. It is viewed as a form of leverage—one can use borrowed money to own an appreciating asset while enjoying generous tax breaks that reduce the cost of borrowing. This logic drives countless buyers toward under-construction homes. But the home loan deduction tax fine print for an under-construction property may play spoilsport.

Home loan deduction rules

Under Section 24(b) of the Income Tax Act, borrowers can claim a deduction on the interest component of their home loan. For a self-occupied property, the annual limit is ₹2 lakh. It should be noted that the deduction on self-occupied property is allowed only under the old regime.

For a house that is rented out or deemed to be let out, there is no upper limit on interest deduction, and it’s allowed under both regimes.

This deduction softens the burden of the loan EMI, especially in the early years when interest forms the bulk of each payment. In theory, this creates a compelling advantage. Even on a self-occupied house, a person in the highest tax bracket who claims the full ₹2 lakh deduction saves ₹60,000 in taxes each year. Over a decade, the savings can exceed ₹6 lakh, improving the effective return on the property and lowering the cost of borrowing. The savings can be far higher for a rented-out property.

But the tax benefit applies only when the property is complete and occupied. With under-construction properties, the rules are different, which can significantly alter the final outcome.

Under-construction purchases