Property Tax Laws on Under-Construction Homes

Property tax laws revision is expected soon. Tax obligation on a property commences as soon as one takes ownership of the property. This implies that an individual is liable for taxes even before and during the construction. The current Union Budget set a 10 percent service tax on 33 percent of the net cost of under-construction homes. This effectively adds to the cost of properties by 3.3%.

Property Tax Laws Revision Under Consideration

The Union Finance Ministry is, however, considering revision of property tax laws to exclude the cost of land from the net cost of under construction homes. This move has been triggered in response to widespread opposition from the Indian real estate sector. The proposed revision is expected to considerably lower the sting of property tax on under-construction homes. With this exclusion of land costs, the effective service tax rate is expected to fall to 1.75%, according to Pradeep Jain, chairman of Parsvnath Developers.

Tax Benefits on a Property under Construction

To claim tax deduction on interest paid on a property loan, the construction on it must be completed within 3 years of obtaining the loan. When this condition is fulfilled, an individual can claim a deduction up to Rs.1.5 lakhs per annum against the interest expense. However, if the criteria is not met, a tax payer can only claim up to Rs.30,000 per annum as deduction.

Additionally, a tax player can not claim tax deduction against principal repayment when a property is under construction. This is because deduction under Section 80C of the Income Tax Act can only be claimed when there is an income (real or notional) arising from the property. 

And, when a property is under construction there is no probability of income. Consequently, principal repayments are only considered for a tax deduction in the year during which the construction is completed. This rule is also applicable on claiming tax rebates against other payments, such as registration charges and stamp duty. If property tax laws are indeed revised, they will have far reaching legal implications.