Composite Loan

The Complete Guide to Home Construction Loans

Thinking of constructing your own home? Then home construction loans are for you. Home construction loans are different from home loans in many ways. Here’s a complete guide on the processes and tax benefits associated with it. 

Eligibility and documents required

Similar to a home loan, the applicant has to submit proof of identity, employment, and income sources. Additionally, the title deed, which is proof of ownership of the land and a no-encumbrance certificate serves as security for the bank until the loan is paid in its entirety.

Furthermore, the blueprints of the proposed house approved by the local authorities would also be needed. The bank will require the final construction plan along with details like the list of suppliers, materials used, marked boundaries, and estimated profits accrued if the house is given on rent or sold in the future.

The loan amount generally covers up to 80-85% of the total cost and is decided based on various factors like the price of the plot and projected construction expenses. 

Before the loan is disbursed, you will also need to pay the margin, which is based on the loan amount as well as the cost of the plot. 

Disbursal and construction

Unlike a home loan, the construction loan amount is not released entirely at once. It is disbursed in instalments depending on the stages of construction. The bank will require photos of the different stages of development as further proof of progress, and sometimes will get them verified by an architect from their end as well.

The steady progress of construction is crucial as it is directly related to loan disbursement. Lenders will decide the time frames for each stage of construction and delays will impact the decision to release the next instalment of the loan.

An important point to remember is that once the construction plan is finalised and the bank has approved the loan, no changes can be made in the layout or design of the house. For example, if you have applied for a loan to construct a two-storey house, it cannot be altered to build a single-storey one.

The cost of interiors like furnishing, lighting, electrical work, plumbing, and other expenses unrelated to construction are not included in the loan amount.

Pre-EMI interest and repayment

When managing a construction loan, you will be required to pay pre-EMI interest, which is limited to the loan amount received. The interest is paid every month on the disbursed amount until the full loan is obtained, after which the regular EMIs will kick in. 

A construction loan disbursal is timed to end when the house is finished. However, your repayments can start earlier, especially if the construction is delayed.

Tax benefits

Section 80C of the Income Tax Act allows you to claim up to Rs 1.5 Lakh for the repayment of the principal amount after the construction is finished. But tax benefits are not applicable if you have begun to pay the EMI before the house has been completed. Moreover, if you sell the home within five years of construction, the tax deductions will need to be reversed. 

Section 24 (b) allows you to claim up to Rs 2.5 Lakh on interest post-construction for a self-occupied property.

One comment

  1. Thank you so much for writing on this topic Swati. I have learned so much from article. I had no idea once the loan is approved you can’t make changes in the design.

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