Real estate projects often exceed their completion deadlines, and it may seem like that just adds to the number of months you wait for your house, but it has a much bigger impact than you think. Even a small delay in property possession can jeopardize your financial planning.
Here is a look at the multiple financial impacts a possession delay can cause.
Tax benefits not as expected
Most real estate transactions are facilitated by home loans. The easy availability and tax advantage of home loans make them a popular choice for buyers. Now, if your property possession is delayed you may lose the tax advantage.
What the rule says: As per the existing law, if you are a home loan borrower, you can avail a tax deduction of up to Rs 2 Lakhs on interest paid towards the home loan. The tax deduction is allowed only for self occupied property as per section 24 of the income tax act.
While every home loan applicant may be aware of the above rule and take a home loan to get a Rs. 2 Lakhs deduction, there is a catch.
The deduction is only available if the construction of the property has been completed within three years from the end of the fiscal in which the loan is taken. For any delay in construction, the tax deduction gets reduced from Rs. 2 Lakhs to Rs. 30,000 only.
For example, let’s say that you took up a housing loan of Rs. 50 Lakhs in November 2011 but you got possession of your property in March 2015. Which means that you did not receive the possession of your property within the three year deadline calculated from the financial year in which the loan was taken (March 2012 in this case). So, the tax deduction on interest paid on your housing loan from the financial year 2015-16 would get reduced to Rs. 30,000 from Rs. 2 Lakhs.
Also, any interest you pay for your home loan for the period before the completion of the construction can also be claimed as deduction. This deduction can be claimed in five equal installments, starting from the year of completion of construction.
If the housing project gets delayed, you are at risk of losing your pre construction interest deduction.
Paying heavy interest
Any delay in completion can mean that you end up paying pre EMI which does not reduce the principal component of your loan. Your home loan EMIs starting only after you receive possession of your house is not always a good thing.
Any delays in possession will mean that you will be paying an x amount as pre EMI without reducing your home loan principal.
For example, you have a home loan of Rs 1 crore and have drawn 95% of the loan with the final 5% payable on possession. Let’s assume your project gets delayed by 6 months you are paying a pre EMI of Rs. 95,000 on the entire amount drawn without reducing your principal amount. So you end up paying close to your EMI amount unnecessarily without helping your cause all because of the project delay.
Your money is blocked
The longer the property takes for final possession, the more the final cost of the property increases. You will be paying your EMIs on your home loan, but with no possession.
The money you may have paid as down payment for your home loan is also blocked, offering you neither any returns nor possession of the property.
For example, you have paid Rs.10 Lakhs as down payment for a project and the project is delayed for 5 years. The same amount, if invested in a traditional fixed deposit with an interest rate of 7.65%, could have helped you make Rs.380064 as returns over the five year period of delay.
Your rental out flow
If you stay on rent and your property possession is delayed, you will have no option but to continue paying your monthly rent as well as loan pre EMI.
As discussed earlier, the pre EMI does not reduce the principal component of the loan and only adds to your financial burden.
Other miscellaneous costs
Delays also mean the cost of construction increases. There is a cost escalation clause which is a part of most builder-buyer MoUs. Under the clause, the builder is free to increase the price if the cost of building materials increases. Every delay can mean a higher chance of increasing costs, resulting in an overall higher cost of property.
Technically and legally you may have no option but to pay the increased cost for the builder’s delay.
I had availed Home Loan 37 Lakhs from a housing loan co. and paid full 90% amount( 54 lakhs) to builder to get rate benefit. EMI’s started instantly, I paid 14 installments and then they discontinued deducting EMI’s due to a delay in project. With in this 14 months I paid total 5.25 lakhs ( 75000 Principle and 4.25 laks interest) .
I was informed that the builder has returned entire money to finance co. This finance co. and builder is from same group of co’s.
Now,after a gap of 17 months, project has re-started. But now finance co has converted our loan on CLP terms !!!
So. I asked them to return 5.25 lakhs paid earlier but they are saying we can credit only Principle amount paid by you i.e. 75000/- and they are non-committal about returning or crediting interest of 4.5 lakhs.
Under the circumstances, I need professional advise about how do I present my case with builder and finance co.and get back interest as well.
Thanks for writing to us. You will need to get in touch with your legal counsel to sort this out.
Bank sanctioned my housing loan in March 2010, and i am availing housing loan in installments linked to progress in construction, and last installment I availed in June 2017. I got the possession of flat in March 2018. Now as per IT rule, if the construction is completed within 5 years from taking housing loan, a deduction of 2 lacs in interest is allwed. I want to know from when on this 5 years is counted, as I have availed the housing loan in installments.
This is usually 5 years from the time you took the Home Loan. We suggest that you speak to your bank for more clarity.