How delayed delivery costs customers buying homes on loans
2016 may be a good year to buy a home. Property prices have remained stagnant for almost a year. While the quoted inventory prices may not have changed, better deals are available in terms of spot discounts, flexible payment plans and freebies across most major residential markets. So, this may be the best time to haggle hard and book a property. "Right now, buyers can get up to 20% additional values in the form of freebies and discounts," says Muddasir Zaidi, national director, residential, Knight Frank India.
But a new trend in the real estate sector may sour your sweet deal. Post the incident of Unitech's top management being taken to court for multiple delays in delivery , developers are becoming more realistic about project completion deadlines.Rather than the standard three-year deadline, fouror five year-completion targets are becoming the norm."It is likely that developers will be keen to hedge their risks of consumer legal action by adopting more conservative completion deadlines," says Anuj Puri, chairman & country head, JLL India.
While developers' aim is to avoid legal action, longer deadlines imply tax loss for those who plan to purchase the property on loan.
TAXING RULES As per the current tax rules, those who purchase a property on loan and for self-use, are eligible for a deduction of up to Rs 1.5 lakh towards principal repayment (under Section 80C of Income-Tax Act) and a further deduction up to Rs 2 lakh towards interest payment (under Section 24D). However, to get deduction under Section 24D, the buyer must get possession of the property within three years of taking the loan. If the three-year deadline is not met, the deduction benefit reduces to only Rs 30,000 a year.
So, if the completion deadline exceeds three years, it would mean a tax loss of Rs 10.9 lakh over a 20-year period (see Graphic) on a loan of Rs 50 lakh. In case of a loan taken jointly, the tax loss could be close to Rs 19 lakh.
The worst is that the rule adversely affects the end user the most.Individuals who buy for investment purposes can always choose to sell and at maximum, the harm would be they will have to pay tax on the shortterm capital gains, if they sell before three years from the of purchase.
People, who are buying a secondhome which they plan to rent, can claim full amount paid as interest as deduction even if they get possession after three years. They do not even have the Rs 2-lakh cap (see Table).
"Asymmetries between the tax regime and the industry practice of project delivery remain, and need to be resolved to protect the salaried class," says Puri. "The government should consider extending the `period of completion' clause for buyer where the are projects are delayed due to the builder," says Archit Gupta, CEO, cleartax.in.
However, till the authorities wake up to these facts and make necessary changes in the law, you need to be careful as a consumer.
WHAT YOU CAN DO NEW-BUYERS If you are still house hunting, apart from the standard guidelines of choosing a reputed builder, it is safer to pick a project closer to completion or at least at an advanced stage of construction. Usually, bigger the project, longer are the deadlines."When the structure construction begins, developers typically take 20 days to lay a floor. So, depending on the total number of floors the building would have, one can calculate how much time it will take to finish.Once the structure is complete, it takes two to three years to finish a project," says Zaidi.
Also a building with basement parking facility will take longer to construct than where parking is being provided at the ground-floor level.However, going for a near-completion project also means you'll be paying a higher price compared to a new launch, which may offset any gains from tax deductions. So, do the math before buying.
Another way is to stall disbursal of the loan. The rule says, "possession within three years from date of taking the loan." So, if you can manage paying the installments for the first few years and take a loan at a later stage so that the project finishes within the three-year deadline, you'll be safe.
EXISTING OWNERS You can choose to sell the delayed property and buy a ready-to-move-in property. However, this property transaction will have heavy entry and exit loads in the form of registration charges and transfer fees. Also, the seller may not get a good price for the delayed project while the ready flat will be at a premium.
Also be very careful of the capital gains rules in such a transaction.The broad rule says: Short-term capital gains tax applies if a property is sold before three years of purchase.However, there is confusion on its interpretation as one pays EMIs in case of home loans. "There is confu sion on how should one calculate long-term or short-term gains. There is no clarity on where the date of original allotment be considered for this or the date of each year's instalments," says Gupta of cleartax.in.
There is debate too on whether an under-construction property should be considered a capital asset. "Only in cases where there is an allotment letter, property specifications are identified and there is a clear right to the owner, it may be considered a capital asset," says Gupta.
The issues have been a subject of a lot of litigation and several case laws discuss these implications."Considering delays in housing projects and current confusion around the rule, the government should seriously consider a relief on capital gains for the first-time home buyers who are selling the delayed project to invest in another property," says Gupta.
Till then, if you calculate the gains on the basis of allotment date, do not be surprised if you get a tax notice seeking an explanation on this transaction.