Under construction vs ready to move in property: Key differences every Indian buyer should know

Whether to go for a ready to move in house or book an under construction house? There are many pros and cons involved in both the options. In my opinion going for a ready to move in house makes sense. Let me explain.

General financial implications

As the saying goes, one in hand is better than two in a bush. The option of going for an under construction property has an inbuilt risk of default on the part of the builder in handing over the possession as promised. There must be many instances around you of delay in possession if not default from the builders.

A ready to move in house option rules out this risk. Going by the trend in the redevelopment segment every Tom, Dick and Harry have become developers without having adequate financial resources. Not only delay due to financial problems, even litigation related with the property may also affect the completion of the project on scheduled time. With RERA (Real Estate Regulatory Authority) the cases of delay have come down significantly but there are still many such cases happening.

As you invest your lifetime savings or tie your future savings for repayment of home loan in a residential house, it is not at all advisable to take such huge risk for a small difference, between the ready to move in property and one under construction. In an under construction property case what you are effectively doing is lending money at a higher rate of interest to the developer.

In contrast to the risk involved in booking an under construction property, ready possession flat offers you one more benefit. In case you intend to shift yourself in the new house, you can save on rentals which you are presently paying. Alternatively, in case you are buying the house for investment purpose the house can be let out and your investment in the house can start generating immediate returns for you.

Taxation implications

In addition to the above general financial implications there are certain income tax implications tied with the decision of a ready possession property against under construction one.

Generally, people fund their purchase of a house through housing loan. The benefits of home loan for a residential house are available only after the construction of property is completed and possession is taken.

In respect of the interest paid on housing loan during the period prior to the year in which you take possession, the income tax laws allow you to claim the same in five equal instalments beginning from the year in which you take the possession. So for self-occupied house property where the maximum amount of interest benefit is generally restricted to two lakh rupees and in case the regular annual interest on your home loan is already more than two lakhs the benefit of amortisation of interest paid prior to completion of the construction is practically lost forever.

Please note that the benefit of Rs. 2 lakhs for interest on home loan for self-occupied house property is available only if construction is completed within five years from end of the financial year in which the home loan was taken. So in case the construction of your house is not completed within five years as stipulated, your eligibility for home loan interest deduction drastically comes down to Rs. 30,000 for self-occupied property.

So in addition to the risk of delay and default for an under construction property you are carrying the risk of reduced income tax benefits in case the construction is not completed within five years. Income tax laws also allow you exemption from payment of capital gains resulting from sale of any asset held for more than 24 months if you either buy a house within two years after or within one year before such transfer.

Alternatively, you can claim such exemption if you construct a house within three years from the date of sale of the capital asset. So in case the builder fails to complete the construction within three years, you again carry the risk of reversal of exemption already claimed and have to pay tax then.

Moreover, for repayment of home loan principal you get a deduction of up to ₹1.50 lakhs along with other eligible items. This benefit is also available only after you have obtained possession. So in case you have repaid part of the home loan during the construction period, you lose the tax benefit for repayment forever as there is no legal provision for amortization of such benefit. And finally going for a ready to move in house will give you more peace of mind than going for an under construction property.

The above discussion is valid in case you have the ability to make the down payment for a ready to move in house else you have no choice but to go for an under construction property. So take your own call after evaluating pros and cons of both the options as per your situation.

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Balwant Jain is a tax and investment expert and can be reached at [email protected] and @jainbalwant on his X handle.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before making any investment decisions.