When purchasing a property, homebuyers are usually divided between a ready and under-construction property. Since both these property types serve and suit different purposes and intents with varied tax implications, it is imperative to know their advantages and disadvantages beforehand. Here is a detailed guide to help you take the decision.
Although buying an under-construction property has become one of the easiest ways to own a home these days, it comes with certain risks including, delayed possession. Hence, amid the constant delays in project deliveries in the last few years, homebuyers have increasingly started preferring ready units. But is one property type better than the other? Let’s take a look at the advantages and disadvantages of a ready and under-construction property in the article below.
An under-construction property does not hurt a buyer’s pocket as much as a ready home does at the time of buying. If factors such as location, amentities, property size and builder are same, a ready-to-move house is likely to cost more than an under-construction one. The difference in pricing can vary by around 10-30 percent.
Buying an under-construction property usually yields a higher return on investment due an extended window period between the buying stage and delivery timeline. If you sell the property closer to possession, you stand a good chance of earning a healthy appreciation on your capital investment.
Any property with Occupation Certificate (OC) as on 1 May, 2017, must be mandatorily registered under the respective State’s Real Estate Regulatory Authority (RERA). Under-construction properties, therefore, necessarily come under the ambit of RERA and thus, become liable to comply to fair trade practices. Buyers can avail information regarding these properties on the State’s RERA website and even seek speedy grievance redressal by the Appellate Tribunal formed under RERA.
One of the prime advantages of a ready unit is the immediate possession. Homebuyers are required to make the payment, go through the documentation work and move in. This also saves them from the double burden of paying rent and the Equated Monthly Instalments (EMI) simultaneously, in case of a home loan.
In case of a ready unit, homebuyers get to actually see the finished product and get what they have paid for. As the unit is ready for you to inspect before you finalise the purchase, there are lesser chances of discrepancies with the promised layout, features, and amenities, among other important things.
The Goods and Services Tax (GST) levies up to five percent tax on purchase of under-construction properties. Ready properties, however, are left out of the ambit of GST
There is an element of risk involved when it comes to investing in an under-construction project. There have been cases when the builder has failed to deliver on time or in some severe cases, failed to deliver at all. This can be attributed to various reasons such as lack of funding, rise in the cost of construction materials and an increase in lending rates, among others. It is, thus, recommended to check the builder’s background before investing in an under-construction project.
One of the most common glitches associated with under-construction properties include the peril of not getting the promised product at the time of possession. Usual incongruities include lesser usable area than promised, changed layout and a deficiency of amenities.
Purchasing an under-construction property attracts a tax incidence of one or five percent of the total cost of property. While one percent GST is payable on affordable homes priced under Rs 45 lakh, it is charged at five percent in the case of properties priced above Rs 45 lakh. With further stamp duty and registration charges applicable, such properties result in heavy expenditure on taxes.
Buyers usually finance their home purchase through loans, which are linked to certain tax benefits under Sections 24, 80EE and 80C of the Income Tax Act. The benefits under these sections are restricted to only ready-to-move-in properties, once the possession has been taken over by the buyer. The tax benefits on the interest paid during the construction of a property can be claimed in five equal instalments beginning from the year of possession.
However, there is a catch here. The tax exemption amounting up to Rs 2.5 lakh on the interest paid on a home loan for a self-occupied property is applicable if the construction gets completed and the homeowner shifts in the house within three years of availing the home loan. In case the construction does not get completed within five years, tax benefits amounting only up to Rs 30,000 can be claimed. These conditions are applicable only if the property is occupied by the owner. In case, the owner decided to rent it out or leave it vacant (deemed let out), there is no restriction on the amount of interest deduction. As far as the tax exemption on the principle amount is considered, if the borrower ends up paying the entire sum before possession, there is no rule to claim back any reimbursement for the principle amount.
Since projects delays have become common these days, those who take home loans on under-construction properties risk losing out on the account of tax benefits.
One of the most obvious drawbacks of buying a ready-to-move unit is the higher cost compared to an under-construction property. As builders provide a finished home without any delay, they charge a premium on such properties.
In case of an under-construction property homebuyers have the option of evaluating the work progress and thus assess the quality of construction from time to time. Buyers can check the materials used, strength of the foundation, and structural integrity, among other key aspects. However, in case of a ready unit, you cannot conduct any such checks.
Unlike an under-construction property, buying a ready unit might not always ensure you a brand new home. It might have been in up for sale for a considerable time. Hence, if it has not been maintained properly, it might have issues like seepage, damaged walls, and rusted iron fixtures, to name a few.
Old ready units with OC as on 1 May, 2016, are not mandated to be included under RERA. As a result, its promoters are not liable to make its information available on a public platform. This raises concerns related to grievance redressal and accountability of the seller in case of any discrepancies
In case you plan to buy an under-construction property by selling off an already existing asset, the construction of that should complete within three years from the sale of the property. If the construction takes longer than three years, the Long Term Capital Gains (LTCG) from the sold property are taxed at 20 percent, coupled with the payment of cess and surcharge.
Income tax rules allow tax exemption on the capital gains from the sale of a property that has been held for more than two years. It is applicable only if the amount earned is reinvested in a property within two years or if it is invested in a house purchased one year before the sale of the asset or used to construct a house within three years. In such a scenario, if the developer delays the possession, you will end up paying a huge amount as capital gains tax.
While under-construction and ready properties have their own sets of pros and cons, homebuyers must evaluate them thoroughly. The purpose and requirement of the property must be gauged to take the most financially optimised decision.
Source:99acres.com