Taxes That Can Make Your Under-Construction Flat Expensive

It is fairly convenient to buy a fully constructed flat, but many flat buyers prefer to buy under-construction apartments in India. This is not surprising because they are cheaper, and the payment can be made in installments while construction is in progress. But, there are greater restrictions on tax deductions on under-construction flats in India. Let us look into the tax norms that apply to under-construction properties.

1. According to Section 80C of the Income Tax (I-T) Act, you can claim a tax deduction of up to Rs. 1.5 lakh on the principal amount of the home loan. You are also eligible for a tax deduction of up to Rs. 2 lakh on home loan interest payment, under Section 24(b) of the I-T Act. On your second home, the total interest payment for the second home, the entire interest payment can be deducted from the income that is earned from it. But, if it is an under construction property, you are not eligible to claim tax deduction on income tax payment while the flat is under construction.

2. From the beginning of the financial year in which construction of the property is completed, you can claim tax deduction on the total interest paid in the period in which the flat was still under construction.  

3. When you buy an under-construction flat, the builder or the developer provides you construction services. So, services tax would be applicable to under-construction flats. But, you need not pay service tax on the value of the land.
4. Recently, service tax was raised from 12.36% to 14%. On an under-construction property, now the effective service tax is 3.5%. This means, a service tax of 14% is levied on 25% of the gross consideration. But, if the flat is worth more than Rs. 1 crore or over 2,000 sq. ft., service tax is 4.2%. This means, a service tax of 14% is levied on 30% of the gross consideration. Earlier, it was 3.9% and 3.71% respectively.

5. You are expected to pay service tax on amenities like car parking, rain water harvesting, club membership, preferential location, electrical installation and fire-fighting equipment installation. You are also expected to pay service tax on financial services like the processing charges for home loans, and on services of real estate agents, lawyers and consultants.

6. But, you need not pay service tax on a single residential unit like a villa or a bungalow, even if it was an under construction property when you bought it. You need not pay service tax on low cost houses either, as long as they are approved by a recognized authority.

7. Value Added Tax (VAT) is also applicable on under-construction flats. Though the norms are vague, and vary from state to state, VAT is applicable on the value of goods while they are incorporated in the building.