All you need to know about home construction loan

By: Homeloan0 comments

A construction loan is a loan to finance the construction of a residential property on land or a plot. Unlike a plot loan, a construction loan allows the construction of a building rather than the purchase of a plot.

A home loan, on the other hand, is a loan to buy an apartment or an apartment building or a home. Even though the property you invested in is under construction, home buyers take out a home loan, not a construction loan, from the bank. It is your builder who has to take out a construction loan to construct the project. If the home is constructed, then a construction loan is applicable

The key features of construction loans:

  • The main difference between a construction loan and a home loan or a plot loan is that a construction loan is not paid out in one go. Instead, the bank will pay out the construction loan in tranches depending on the progress of the work.
  • A construction loan will only cover the structural make-up of your property building. That means your loan won’t cover the cost of refurbishing the interiors of your property.
  • Borrowers should also keep in mind that banks usually fund a certain percentage as a construction loan as well. Generally, private lenders offer 80% of your estimated construction cost as the loan.

Let us have a look at the advantages of a home construction loan.

  • More economic and saves money

Borrowing a home construction loan can help you save more money

  • Higher satisfaction

When you build your home, you become more satisfied. This is especially true when you construct your dream home and see it from start to finish. It also makes you feel more connected to your community.

  • Lower payment

Negotiating with the builder and purchasing raw materials will help you save money while constructing your home. You can purchase raw materials and other essential items on your own and save more money. If you don’t want to invest a lot at the same time, you can postpone some unneeded tasks or unimportant items for the time being. This will help you save more money compared to buying a ready-to-move-in flat where you can’t make any changes.

  • Instant Equity

Building your own house will help you build instant equity. Saving money in a savings plan takes at least 10-15 years to build up equity, whereas constructing a home helps you build up the equity immediately.

Let us have a look at the Income tax benefits of a home construction loan.

Tax Exemption for Home Construction Loan:

Pre-construction phase refers to the period between the date of the loan and the construction of the property. The provisions of the Indian Income Tax Act specify the conditions under which salaried employees can claim a tax deduction on the interest on the home loan.

Deduction under Section 80C

The principal component of the home construction loan can be claimed under this Section. Once the property is constructed, you can claim the maximum deduction under this Section of Rs. 1,5 lakhs.

Deduction under Section 24 of the Income Tax Act

Under Section 24 of the ITA, you can deduct the interest on your home construction loan up to Rs. 2 lakh. However, only if you complete building your home within 5 years after taking out the loan, else you can claim only Rs. 30 lakh in deductions.

Under Section 80EE, you can claim another Rs. 50,000 in deductions on the interest on the home construction loan. This deduction can be claimed every fiscal year until you repay the entire loan amount.

To be eligible for this deduction, your loan amount must be below Rs. 35 lakh, and your property value must not exceed Rs.50 lakhs.

You can claim this deduction only if your home construction loan is sanctioned between 1.04.2016-31.03.2017, in addition to the Rs. 2 lakh deduction under Section 24.


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