Should you choose under-construction property for better tax efficiency?

Property and income tax: I am evaluating whether under-construction property offers better tax efficiency compared to ready-to-move-in homes. While the lower entry price and potential appreciation are appealing, I am concerned about the timing of tax benefits. Interest deduction under Section 24 is available only after possession, and principal repayment benefits under Section 80C are also linked to completion. Does this delay reduce overall tax efficiency? How should I assess the trade-off between upfront cost advantage, deferred tax benefits, and risks like project delays when making a long-term real estate investment decision?

Advice by Shiv Garg, Director, Forteasia Realty and Sudhir A Patel, Director, Shyam Group

Under-construction properties can be tax-efficient, but the advantage is largely deferred rather than immediate. One of the biggest draws is the lower acquisition cost. Even after factoring in 5% GST, under-construction homes are typically priced below ready-to-move-in properties, where embedded costs and premiums often inflate the base price. This creates a margin for potential capital appreciation, particularly if the project’s completion aligns with upcoming infrastructure developments such as metro lines or highways.

Beyond pricing, construction-linked payment plans offer flexibility, allowing buyers to stagger payments instead of committing a large upfront amount. Early investors also benefit from better unit selection and access to modern amenities, while the phased payment structure supports smoother financial planning.

However, the tax dimension requires careful evaluation. Deductions on principal repayment under Section 80C (up to ₹1.5 lakh) and interest under Section 24(b) (up to ₹2 lakh for self-occupied property) are only available after possession. This means investors may face a period of cash outflow without immediate tax relief.

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As Shiv Garg, Director, Forteasia Realty Pvt. Ltd., explains, “The Section 80C deduction for principal is available only after possession, while pre-construction interest can be claimed in five equal installments starting from the year of possession.” This provision ensures that while benefits are delayed, they are not lost, and can help smooth taxable income over subsequent years.

At the same time, the interim period can strain liquidity. Sudhir A Patel, Director, Shyam Group, notes, “You cannot claim principal or interest deductions during the construction period, even though EMIs may continue for 2 to 4 years until possession.” This highlights the importance of having sufficient cash flow to manage overlapping financial commitments, especially if you are also paying rent.

There are also execution risks to consider, with project delays being the most common concern. While regulatory frameworks like RERA have significantly improved transparency and accountability, delays and minor deviations in final delivery can still occur.

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In essence, under-construction properties are better suited for long-term investors who can absorb short-term cash flow pressures in exchange for lower entry cost and deferred tax advantages. For buyers seeking immediate tax relief and occupancy, ready-to-move-in homes may offer a more efficient route.

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