Synopsis: This article lists down the kinds of home loans, EMI rules and other tax benefits one can avail if you are planning to own a house.
According to the reports issued by the Reserve Bank of India, in its 2023 Financial Stability Report, the share of residential home loans has increased from 8.6% to 14.2% in the past 11 years. Owning a home is still a dream and a financial commitment for many Indians. This deep-rooted desire fuels the housing market of our nation to this date and will keep fueling it in the coming decades too.
Can You Take a Loan to Build a House?
- Loan to Buy a House: As the property already exists and is ready to move in, valuation and other legal formalities will be simpler. Therefore, loan disbursement is usually on time, and full EMI starts shortly after the loan is disbursed.
- Loan to Construct a House: These loans are provided for the self-construction of a house, and money is released in stages as the construction progresses. On hitting milestones like foundation, plinth, brickwork, etc., the money will be disbursed. Borrowers can start paying pre-EMI, which is interest on the amount disbursed, while the construction is ongoing. Or they can opt for full EMI.
- Loan to Buy Land and Construct a House: These loans cover the purchase of a plot as well as the construction of a house on the plot. They are known as composite loans. Here, the lender would pay first for the land and later for construction in stages, depending on the progress of work. Often, many lenders urge to start the construction as soon as the land is purchased, and also have a time limit within which the work should be completed.
Eligibility Criteria for a Home Loan
- Age and Employment Status: Lenders prefer salaried employees with stable jobs, consistent salary, good credit history or self-employed applicants with a steady business and predictable cash flow in the past 2-3 years. Age preferences varies but generally, applicants falling in the working age brackets are preferred.
- Income & Repayment Capacity: Lenders use the Fixed Obligation to Income Ratio (FOIR) or EMI- to- income ratio to calculate how much money an applicant can comfortably pay back. These tools focus on monthly income after deductions, pending EMIs, and dependents.
- Credit Score & Credit Behaviour: Credit score shows your creditworthiness. Banks and other lenders use an applicant’s credit score as the standard to determine whether providing the loan is a good business decision or not. A credit score of 750 and above is considered to be strong. Often, lenders also check other factors such as credit history, credit card utilisation ratio and number of loans taken.
- Loan-to-Value (LTV) & Down Payment Expectations: Loan-to-Value (LTV) is calculated by dividing the loan amount by the project value. For self-construction loans, lenders usually fund a portion of the project and sometimes the whole project. Lenders might insist that applicants contribute their own money as a down payment and use the loan amount for later stages.
Also read: Here’s How You Can Save Up to ₹36,000 in Tax on Gold and Silver Investments
Tax Benefits You Should Know
Old Tax Regime:
Section 80C: Under this section, a deduction of up to 1.5 lakh can be claimed on the principal portion of the EMI in a financial year. However, this claim can only be claimed after the construction of the house is complete and possession is obtained. Also, if the house is sold within 5 years of getting possession, the deductions claimed under Section 80C can be added back to income in the year of sale.
Section 24(b): For a self-occupied house, under the old tax regime, a deduction of up to 2 lakh per year can be claimed for a home loan interest. For let-out property, interest deduction is not capped. However, the loss that can be set off against other income is limited to ₹2 lakh per year, and the remaining loss can be carried forward for up to 8 years.
Additionally, note that if the construction of self-occupied property is not completed within the prescribed time, then the cap on deduction that can be claimed would fall to 30,000 a year instead of 2 lakh.
Treatment of Pre-Construction Interest: The interest paid before the completion of the property is called pre-construction interest. For self-occupied property, it can be claimed in five equal instalments starting from the year of completion, within the overall ₹2 lakh annual limit under Section 24(b). For let-out property, the full pre-construction interest can be claimed against rental income
Additional Deduction for First-Time Homebuyers (Section 80EE / 80EEA): Earlier, first-time homebuyers were eligible for additional interest deductions under Section 80EE and Section 80EEA, subject to conditions such as loan amount, property value, and loan sanction date. However, these benefits are largely discontinued for home loans sanctioned after March 2022. Only loans sanctioned before the prescribed cut-off dates continue to remain eligible.
New Tax Regime
Under the new tax regime, interest deduction on self-occupied property is not allowed. For rented or let-out property, you can claim interest on the home loan against rental income, though losses cannot be set off against other sources of income
Conclusion
Building a house can be financially challenging as well as rewarding. But understanding how home loans, EMIs and tax rules work is crucial to execute this once-in-a-lifetime project. Plan ahead to make your dream home a financially sound one.
Written by Nila Maria Jacob
