PERSONAL FINANCE - Home Project Delays Can be Really Taxing

PERSONAL FINANCE - Home Project Delays Can be Really Taxing

Sanket Dhanorkar & Chandralekha Mukerji

Mumbai

Sachin Kala is still waiting to get possession of the flat he booked four years ago. Even though Kala has paid almost 80% of the total price, the project is still not ready to move in. Kala's only solace is that he is not alone. According to real estate analytics firm PropEquity, around 45% of the 3,753 projects in the Mumbai Metropolitan Region (MMR) offered for possession during 2011-2014 are still not ready. The problem is more acute in the Delhi NCR region, where a whopping 78% of the 856 projects have got delayed. The same trend is visible in other major cities like Bengaluru, Chennai, Hyderabad, Pune and Kolkata. The real estate regulatory Bill that has been approved by the Cabinet and will be tabled in the Parliament soon has several buyer-friendly clauses. The Bill proposes that builders deposit 50% of the amount received from buyers in a separate escrow account. This will prevent diversion of funds and timely execution of a project. Also, a buyer can claim full refund with interest if a builder fails to deliver on time.

Struggling with EMIs

The delay in possession can be financially debilitating for both first-time buyers and investors. Many buyers factor a 10-12 month delay into their planning when they book, but very few expect the delay to extend beyond two years.However, housing projects across the country have got delayed by 24-36 months.End-buyers like Kala, who expected that EMIs will replace the rent payment, are seeing their monthly budget spiral out of control as they have to fork out money for both. The situation is not any better for investors who bought their second or third house. They had expected their investment to start earning rental income, which would take care of some portion of the EMI. However, their calculations have gone awry due to the delay .

Losing Tax Benefits

A delay in getting possession also implies you will not be able to benefit from tax deduction until the project is completed. Home buyers count on the tax breaks in the form of deduction up to ` . 1.5 lakh towards principal repayment (included under Section 80C) and a further deduction up . 2 lakh towards interest payment (included under Secto ` tion 24). However, to get deduction under Section 24, the buyer must get possession of the property within three years of taking the loan. If the 3-year deadline is not met, the deduction benefit reduces from ` . 30,000 a . 2 lakh to ` year. For a buyer with a ` . 50 lakh home loan, a project delay would translate into a tax loss of ` . 10.9 lakh over a 20year period. In a joint loan, the loss could be higher.

One possible way out of this situation is by selling the delayed property and buy a ready to move in property.However, real estate transactions cannot be done very quickly. They also have very high entry loads in the form of registration charges and transfer fees. Also, the seller may not get a very good price for the delayed property while the ready flat will demand a premium.

Mercifully , the three-year rule does not apply to property that is rented out as the entire interest is deductible even if the construction takes over three years. So, people who have bought real estate as an investment and intend to rent it out can breathe easy . “There would not be any tax-related loss. However, the tax benefit gets deferred till you get possession,“ says Sudhir Kaushik, CFO and co-founder, Taxspanner. Another solution is to delay the loan by funding the first few instalments out of your savings. The three-year countdown begins not from the time you booked the flat, but from the last day of the fiscal in which the loan was taken. You can liquidate some of your investments to pay for the initial instalments. However, do consider the opportunity cost of utilizing the money versus investing it in some other asset class.

Avoiding Delayed Projects

A certain degree of due diligence can protect consumers against unscrupulous practices by developers. Assess the builder's track record. Ensure the developer has clear titles and necessary permissions. If top banks are lending, rest assured that all documents and approvals will be in place. What are the terms of payment? If the builder asking for most of the cost at an early stage of construction, beware. Even in construction-linked payment plans you could face problems during the finishing stages. Under these plans, almost 70-80% of the loan is disbursed by the time the structure is complete and it is at this stage that a cashstarved project will slow down. Even a year's delay will add hugely to your interest cost. If the builder delays construction, the buyer takes a hit.