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Allow pre-construction interest deduction in Income Tax for under construction properties

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Honorable Finance Minister of India

This petition is being issued to increase awareness, and draw the attention of the present government on subject of pre-construction period interest exemption withing the Income Tax Act and the malice of the real estate industry due to which there is huge financial burden on the middle income salary class of India. The collective efforts of the government and citizens of the country can reverse the negative impact on this situation.

We wish to draw your attention to the problems of tax paying salary class of India, the only set of people (perhaps) who are true to the nation and are paying taxes as per well-known statistics of the Government. 

The salary class citizen pay taxes at source on their earnings. The most important class of the country which shells out the various cess payments as well apart from the hefty tax.  The class that supports the Government, not only by truthfully bearing the taxes that are drawn before the earnings by their employers, but also majority of the Central and State Government employees fall within the same class and practically they support every endeavor of the nation building.  The income for this class is normally subjected to tax not after setting off the expenses (typical income and expenditure statement is not prepared) and this class does not enjoy the host of benefits that are available to business class and/or corporate, some widely misused for example depreciation, and professional fee.

There are only a few avenues where the exemptions and/or deductions are extended to this class under the income tax laws of the country. One such avenue that is available to the salary class as well is Deduction of Interest on Home Loan.

Deduction of Interest on Home Loan

In case a citizen takes a home loan for purchase, construction, repair, renewal or reconstruction of his/her house – the interest that is paid to the bank is allowed as a deduction. As per Section 24 of the Income Tax Act, Deduction for interest on money borrowed is allowed bereft of any brokerage or commission for arranging the loan.  

In case of a self-occupied house property, this deduction is allowed. Since there is no income against the house the interest paid is treated as loss under the head House Property. This loss is allowed for set-off against salary.

The total amount allowed towards this deduction is Rs 2,00,000 beginning assessment year 2015-16.

To boost the real-estate sector this exemption has been extended for let out or deemed let out property as well with conditions, but for the sake of brevity of this discussion we need not dwell into that for now.

Pre-construction interest

What about the interest paid during the construction period, is the natural question that comes to the surface. It is also allowed when the loan is taken for purchase or construction of a house property (not allowed in case of loan for repairs or reconstruction).

The deduction for the pre-construction period interest is allowed in 5 equal installments starting from the year in which the house is purchased or the construction is completed.

Though pre-construction interest is allowed to be deducted on the basis of 1/5th each year beginning the year in which the construction is completed – the total amount of preconstruction interest and interest on housing loan that can be claimed in a year should not exceed Rs 2,00,000 in any case.

No Interest set-off possible without completed construction

However, there is a problem, one cannot start claiming this interest (both types listed above) until the construction of the property is complete. This was perhaps a measure to force the builders and developers to complete the projects

Real Estate Industry in India

The situation of the real estate industry is well known.  The number of cases that are in the lower courts are countless.  There have been some cases that have reached National Consumer Courts, and some have reached the Supreme Court. There is ever growing interest of everyone as to how the developers and builders come out of the present situation with states slowly implementing RERA regulations.  There is a tussle that is going on if a class action suit can be filed for loot and plundering that has already gone in the previous regimes of governance. The courts have already intervened for proper resolution of the issues of taking monies from the innocent home seeker middle class / salary class buyers, and builders not completing the projects and the related political malice that had been there.  There is already one prominent builder who is seeking bail to return the monies of the flat buyers by selling his house, and another who is proceeding towards bankruptcy.

The cause of the main petition

The unfortunate situation in all this is the apathy of the honest tax paying salary class of India.  Which on one hand is paying rent (or not receiving HRA) to provide shelter to its family, and on the other hand is paying EMI of the house or flat that was supposed to be delivered many years earlier by these builders.

As the deduction of interest on borrowed capital for home (both types that are enumerated above), are not available unless the construction is complete, they find themselves in the vicious circle of debt repayment, interest burden, rental payments, with no relief on either the rent or the EMI or the tax exemption.  Whilst these cases are in the courts this situation is not likely to get resolved anytime soon.

Majority of these home buyers had computed the benefit of income tax exemption in their calculations while taking the home loans, assuring themselves that the pressure on finances will be only during the construction phase, when they have to put in the capital from their past savings, and bear the initial lower EMI’ during the construction phase.  The premise was that once the flat is complete and handed over the shift on finances will occur from Rent payments to EMI payments and a capital asset will get created. The Deduction of Interest from income tax was the trade off against the rent exemption.

The non-performance of builders/developers has put these home buyers under tremendous pressure of the finances on these common citizens of India.

Through this petition, we seek (in the order of priority listed)

1.     The condition of construction completion be relaxed in Section 24 of the Income Tax Act.

2.     Pre-Construction Interest be allowed as deduction each year instead of 5 years from the completion of construction.

3.     The pre-construction interest actually paid (not accrued) should be allowed in Financial Year 2017-18 as one time deduction.

4.     Instead of seeking the PAN of the financial institution from which the capital has been borrowed, the builder/developer PAN number should be made mandatory for claiming these exemptions, so the Government does not have to rely on builders/developers to inform if they are in default or not (which is one of the intents of the RERA). 

5.     The tax returns filed by the individuals will give the required information to the Government about the builders flaunting the rules.

6.     The banks and financial institutions, should be asked to book NPA for borrowed capital where the period for which the EMI paid by the borrower is more than 5 years and the construction is not complete.

7.     The recovery proceedings by the banks should be enforced against the builders instead of innocent home buyers, as they should have ensured collaterals before allowing the builders to induce public.  This will pave the way for stopping the EMI without affecting the credit history of the home buyers.


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