Understanding Home Loan Disbursements for Under-Construction Properties

Most homebuyers seek financing or home loans from banks and reputed financial institutions. By investing in an under-construction property, you may be able to afford the home of your dreams at a lower price. Most lenders offer home loans even when the project is in the construction stage. Let us take a look at how home loans are disbursed for under-construction properties.

Advantages of taking a home loan for an under-construction property

Your home loan repayment terms will depend on the terms mentioned in the loan document you receive from your bank or NBFC. In general, home loans for under-construction property will come with certain benefits.

In most cases, when you opt for an under-construction property, the bank does not pay the entire sanctioned loan amount at once. The builder is paid the property value in tiers as the construction progresses. You may not be required to repay the principal at this time (referred to as the pre-EMI period). You will only be required to repay the interest on the loan amount disbursed. Your EMI for principal and interest starts once the construction is completed and the whole principal is paid. This makes for easier financial planning.

Understanding home loans for under-construction properties

Let us understand this with an example. Let us suppose you have been sanctioned a home loan for an under-construction property for INR 50 lakhs at an interest of 10 per cent. So, as the construction starts, your bank disburses INR 20 lakhs, another INR 20 lakhs after half the construction is done and the remaining when the construction is completed. So, as long as the first stage of construction is ongoing, you are required to pay only the interest on the initial INR 20 lakhs, i.e., about INR 16666 per month. As the second instalment is paid, you will need to repay interest on INR 40 lakhs, i.e., INR 33,333 per month. Finally, as the total amount is disbursed, you will need to pay the EMI, which is interest and principal repayment in monthly instalments.

This is an advantage most banks and lenders offer, but the homeowner may choose to start repaying the principal and interest with the first loan disbursement. This helps pay off the loan quickly and entitles the homeowner to some tax benefits as well. These terms must be clearly discussed with the bank at the time of loan application.

Tips for Home Loan Seekers

If you are looking to buy an under-construction property and are seeking a home loan, these are some things to keep in mind.

• Compare loan products from several banks and NBFCs before you apply. The application will impact your credit score, so it is a good idea to know the loan terms before applying.
• Invest in a project with a developer with a good reputation and track record of delivering on time. Look up the RERA registration details and check the commencement certificate of the project.
• Pick a project in a good location that offers the amenities and facilities you need for your family.
• Check the planned construction schedule and keep regular tabs on the progress through site visits. Check if the construction is in compliance with the approved unit and floor plans.

Can I claim tax benefits on an under-construction property?

Section 24 B of the Income Tax Act allows you to claim benefits on the repayment of interest on a home loan. If you buy a ready-to-move property, this deduction can be claimed from the year of loan disbursement as the complete loan is availed, and you start paying off both the principal and interest through EMI.

In the case of an under-construction property, however, you cannot claim the deduction on the repayment of the interest when the construction is ongoing. Once the construction is completed and you take possession of the property, however, you can retrospectively claim the income tax deduction for the interest paid during construction. This can be done in 5 equal instalments. The total home loan tax deduction under Section 24 B in any year cannot exceed INR 2 lakh.

Under Section 80 C, homeowners can claim income tax exemption of up to INR 1.5 lakh on repayment of principal through the construction (if the principal is repaid during this period) and the rest of the tenure.