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You can claim interest on a loan after construction is over

If you have a second flat which is let out, it shall be considered as let-out property.

I bought the flat in which I stay now in 2006 with a bank loan, which I foreclosed in February 2013. Last year, I bought another flat which is under construction and is expected to be completed by 2014-end. For this, too, I took a bank loan. Will I be eligible for income-tax break on the interest and principal paid on the loan for the second flat? Once the construction of the second flat is completed, will I have any income-tax liability on the rental value of the flat? How will the rent value be assessed?

—Amit

You will be entitled to claim the tax benefit in respect of interest on housing loan availed for the second flat once the construction of the second flat is completed. With respect to tax deduction on principal repayment of the housing loan, there is ambiguity on whether the flat should be constructed to claim deduction under section 80C of the Income-tax Act, 1961. But there is a view under which it may be possible to claim it when the property is under construction. This deduction shall be subject to the overall limit of 1 lakh.

If the second flat is actually let out, it shall be considered as let-out property (LOP). The actual rent will be taxed, subject to certain tax deductions. You can claim deduction towards municipal taxes paid during the relevant financial year and a flat deduction of 30% of annual value (after deduction of municipal taxes) towards repairs and maintenance charges against the rental. Further, you can claim the entire interest payable on housing loan against the rental. Further, the pre-construction interest can be claimed in five equal instalments starting from the year in which the construction of the second flat is completed. The balance rent amount, if any, will be taxable under the head “income from house property".

If you use the flat for self residence or the same is vacant, then, the second flat will be considered as deemed to be let-out (DLOP). In such a case, the deemed rent will be calculated by determining the rent at which the residential property may reasonably be let out, which may be based on valuations of similar properties in the neighbourhood or certificates from the society or a certified valuer. Further, you will be entitled to avail the deduction towards municipal taxes, standard deduction and interest payment as mentioned above against the deemed rent to arrive at its taxable value.

Since you would own two residential properties, if the second flat is not rented out for at least 300 days in a financial year, there may be wealth tax implications.

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