Income Tax benefits of EMI on houses under construction

Let me first explain the scenario before actually getting into the details of the procedure. You have bought a house. You took home loan for that and every month you pay an EMI towards repayment of that loan. The house is still under construction so you do not have the possession letter for that house. In your EMI, there are two components - Interest and Principal. In the early stages of repayment, the interest part is huge and the principal part is very less. You can avail tax benefits on both the components separately. There is an upper cap of 1 lacs for the principal component and another slab of 1.5 lacs for the interest component. The catch is that for the interest component, you need to have the possession of the house before you could avail any benefit on the interest paid.

Now the problem statement: How do we get the benefit on this huge amount of interest that we are paying every year when we do not have the possession of the house.

Solution 1: WAIT till you get the possession of the house. Suppose you started your EMIs in August, 2008 and you get the possession of the house in January, 2012. That means for the year 2008, 2009, 2010 and 2011 you could not avail any tax benefit on the interest component while in 2012 you would get a benefit on a maximum of 1.5 lac towards interest of your EMI.

Do this:

Add the interest paid by you all these years, i.e. Interest in 2008 + Interest in 2009 + Interest in 2010 + Interest in 2011.
Say the total Interest comes to I
Now divide this into 5 equal parts -> I/5 = I_part

According to the rule books, you can avail income tax benefit on this whole amount of I_part for 5 consecutive years since the year of possession, over and above the 1.5 lac slab for your interest component for the current financial year.

Hence in year 2012, you get full benefit on I_part + benefit on a maximum of 1.5 lacs for the interest paid in 2012.

And the same continues for the year 2013,2014,2015,2016

Solution 2: Consult a lawyer. Usually the CAs do not allow anyone to avail any benefit on the interest part without having the possession of the house. They do so because they are not supposed to break or even bend the rules that have been set by our government. In such a case, the lawyers have a different opinion. They say that when you are paying so heavily without even having the possession of the house, then why should you not get the benefit. (it actually makes sense too) The rule needs to be modified. And they have their own legal ways in which they get the refunds for you while filing your IT returns for that financial calendar. You just have to provide them your Form 16 and the total interest you have paid (and other related documents and stats as asked by the lawyers).

The first solution is obviously better since you get the benefit on the entire amount instead of a cap of 1.5 lacs. But it takes time. So if you are under a financial crunch, get a lawyer to file your IT returns rather than your accountant doing so for you. The lawyer will obviously charge you for that, but then he is also on a job, no social work :P

I opted to wait :)