Double Whammy of Late Possession

Anil took a home loan about four years ago, calculating that the builder would complete the project by the time the moratorium period on the loan had been completed. Now, four years down the line, the builder has yet to complete the handover. Plus, with the moratorium period having run out, Anil has to pay for both the home loan EMI and the rent on the house that he currently occupies.

Does any of this sound familiar?

This is the plight of many who have taken out loans for their dream home but have yet to get possession. According to PropEquity, a real estate analytics company, an estimated 45% of new projects that were earmarked for possession during the 2011 to 2014 period in the Mumbai Metropolitan Region were designated as incomplete. The situation was even worse in the Delhi NCR region, where an estimated 78% of projects were running behind schedule. Unfortunately, this general trend is visible not just in these metros but all over the country. In the following sections we will discuss how a late handover by a builder, such as in Anil’s case, affects the average borrower and what measures you can take to reduce such risk.

The Double Payment Conundrum

The most obvious effect of late property handover is that borrowers have to dish out both the home loan EMI amount and their monthly rent for their current accommodation. This is of course applicable to first-time home buyers. In case you took the home loan for a second home, the situation might be slightly better as you may not be paying rent on the property you are currently residing in. However, even in the latter case, you will have to start paying the EMI on your loan and you will end up losing out on the extra income that could have come in the form of rent.

The Loss of Tax Benefits

The other adverse effect of delayed possession is the loss of tax benefits that are applicable on a home loan. The current limit of tax exemption for home loans is up to Rs. 1.5 Lakhs under section 80C and a further deduction of up to Rs. 2 Lakhs towards interest payment under section 24B. Unfortunately, the section 24 deduction is applicable only if the buyer receives possession of the property within 3 years of taking the loan. In such a situation, if Anil had taken a loan of Rs. 50 Lakhs, his loss in terms of just tax deduction under section 24 would amount to almost Rs. 11 Lakhs over a 20-year loan term.

Table 1. Total Tax Savings under on Home Loans over a 20 Year Loan Term

Home Loan Amount	Section 24 Benefits	Actual Total Savings over tenure
50 Lakhs	Up to a maximum Rs. 2 lakhs per annum	Rs. 11 Lakhs

In case you are purchasing the new property to rent it out, this tax deduction would still apply. There would, therefore, be no direct loss as such savings will be provided after the property is handed over even if the project is delayed by over 3 years. You will, however, lose out on any interest you might have earned by investing the tax savings you were eligible for during the delay period.

Four steps you can take to protect yourself

The skyrocketing demand for housing all over India is considered to be the key reason why many projects get delayed with the lack of correct/complete paperwork being cited as the key reason for delayed handover. The following are some key points to keep in mind when considering a new project for either an investment perspective or as your first home.

• Perform a background check on the builder.
• Take home loan for a project that is approved by the bank
• Get copies of key clearance documents, such as land use certificate and other NOC documents

Find out and understand the delay clauses in the builder’s agreement – In some cases, builders put in a cost escalation clause that favors the builder in case of a delay. This type of agreement is best avoided. For detailed and additional tips check out the 9 things to do when buying a house.