Ready to move in or under construction–What should I invest in? This is one of the most common questions that crosses every prospective home buyer’s mind. Thus, here we try to delve into each aspect of buying property in both the stages in question.
Merits of Under Construction Property
● Cost Installments: Under construction property, in most of the cases, is relatively affordable when compared to ready to move in property. Thus, a buyer pays the down payment, which is mostly 20 per cent as the booking amount and rest is paid in the form of the EMI in case of loan, else they can pay the money in installments as per the construction schedule. However, it means that you end up paying interest on the home loan plus rent for your current accommodation.
● Choice of locality and floor: Like that view from the topmost floor? Make it yours! In ready to move in apartments, you don’t have many choices about locality or floor, where in under-construction property you get an array of options to choose from.
● Good for investment: Since prices are lower, one can garner good returns. Moreover, with land getting exhausted in the city centres, most of the new projects are coming up on the peripheral areas. Thus, the scope of price appreciation due to future development is high in these new launched projects. However, to avail this benefit of price appreciation, one must do a basic study about the proposed and ongoing development plans in the region before buying a property.
● Customisation: Few developers allow customisations (to some extent) as per individual’s requirements in the construction stage. However, this depends from developer to developer and project to project.
● Payment Options: In under construction, usually a buyer gets several payment plans, which includes construction linked plan, down payment plan, 30:70 scheme, 20:80 scheme to name a few.
Demerits of under construction property
● Possession: The incidents of delay in completion of projects have increased tremendously in the past three to four years. This is mainly because liquidity crunch, dispute on land or incomplete permissions from the concerned authorities. In certain cases, developer starts the construction before getting all the requisite approvals. Also, there have been instances where a developer have siphoned-off the money collected from a new launch project for some other project. Thus, it is imperative to check that developer is really committed to complete the project or else you may have to pay extra expenditure on EMIs, interest on EMI and rent. One should also check the clause for penalty given by the developer in the case of delayed possession.
● Model Flats: As opposed to ready to move in, in under construction property, you at times don’t get what is promised to you. Sometimes the layout is changed, while sometimes no adequate storage space is provided. In this situation the buyer has no other option except accepting the apartment as provided by the developer. The buyer can approach the consumer court in case he has written proof of everything, but many times the promises made by the developer are oral.
● Community: Apartments are generally not very private type of a housing space. You have to share all the amenities and celebrate your festivals with the people receding in your society. Thus, it is important to check how the community is maintained in order to ensure good life and good returns on your investment.
● Income tax benefits: People generally invest in the second house to get tax benefits, but they realize it later that the tax redemption on EMI can only be availed after getting the possession of the property. So, if you are buying an under construction property as your first house and the possession gets delayed due to any reason, in that case you should be prepared for paying the EMIs without tax redemption along with the rent which could be quite frustrating.
● Service Tax: Under construction properties comprise an additional cost of service tax for the services provided by the builder or developer in construction of common civil structures. For properties valued below Rs 1 crore, the effective rate of service tax comes up to 3.50 per cent (14 per cent on 25 per cent of property value), while for properties valued above Rs 1 crore, it is 4.2 per cent (14 per cent on 30 per cent of property value). Service tax is payable only on property purchase directly from builders and is not applicable for resale properties.
● Value Added Tax (VAT): The government also charges a specific VAT depending on the city. At present, VAT is only applicable on properties bought in selected states. For instance, according to the latest Karnataka Value Added Tax (Amendments) Act of 2012, VAT is charged at around 5.5 per cent in Bangalore. In Mumbai, it is charged at 1 per cent, while there is no VAT on properties in Noida, Chennai and Kolkata.
● Less Clarity on Maintenance Charges: At this stage, there is less clarity on maintenance charges. This is because initially developer takes some amount as maintenance charge and creates a corpus fund for maintaining the project for some time (varies from project to project). After possession, a society is formed to take care of the maintenance. This society decides the actual maintenance charges that a buyer has to pay.
● Exit Clauses: In many cases, developers have certain clauses pertaining to the exit. For instance, there could be a clause of no exit for a certain period or even if it is there, the transfer charges would be very high. Thus, before signing off the deal, do read of about these clauses.
Merits of Ready to Move in Property
● You get what you see. In ready to move in properties, one does not have to compromise on quality or design layouts. This helps you make a better choice according to your needs.
● Relief from Rent & Traveling costs: In under construction property, even after paying all the installments you might have to wait for 1-2 years before getting the keys of your home. While, in ready to move in apartment you can move immediately and get relieved from paying extra rent and traveling costs.
● Community: In a ready to move in apartment you have the advantage to know your neighbors. More importantly, the upkeep of the amenities and facilities available within the community can be inspected.
● Tax Exemption: According to the Income Tax Act 1958, the principal repayment upto Rs 1.5 lakh is eligible for deduction under section 80C in loan taken for ready to move in properties. The interest paid for a loan on a first home is eligible for a deduction upto Rs 2 lakh per year, and for a second home the entire interest payment can be deducted from the income for the purpose of income tax calculation.
● Documents in Place: Since the property is already completed, checking the legal status becomes relatively easy. One can check documents such as completion certificate, occupancy certificate and list of titles etc.
● No Service Tax and VAT: There is no service tax or VAT in case of a ready to move in properties.
● More Clarity on Maintenance charges: At this stage, one gets to exactly know the maintenance charges that one has to shell out.
Demerits of Ready to Move in Property
● Paperwork: Since an under construction property is mostly bought directly by the developer, the paperwork is less tedious. However, in ready to move in, since a person is involved and all transfer documents are required, paperwork is time consuming.
● Higher Upfront fee: In ready to move in property, it’s all about striking the right deal with the right seller. As opposed to under-construction property, where developers (in some cases) might adjust with 10 per cent booking amount, in ready to move in, this is not the case. In addition, you will also have to pay transfer charges on the property. Another problem comes in the valuation of property. In case, buyer is applying for a loan amount to which both the parties have agreed to, but the cost of property as per bank differs, then the loan will only be sanctioned for the amount to which bank agrees to.
● Exhaustive Legal Checks: It is very important to do the footwork and engage a lawyer while buying a ready to move in property as thorough legal checks are required. There have been few instances where the owner has sold one property to more than one party. In such a case, you could lose your hard earn money fighting a court case.
● Higher Prices: Most people prefer ready to move in apartments in areas that have basic social and physical infrastructure in place. Thus, since in area is already developed, and if you are buying a property which is more than 5 years old, you will end up paying for the higher price. In cases where interiors are done, asserting the real value of the property become a major challenge.
● Complex Legal Work: In case of resale properties, transferring can be a bit tedious and complex. Also, if the property is old, there could be damage that you will have to get repaired.
Know about Tax Exemption
● You can avail tax exemption instantly only on ready to move in properties, while in an under construction property, the buyer will be considered eligible for tax exemption (both on principal amount and the interest payments) only if the project is completed in a span of three years. You can, however, claim the rent allowance deduction for the period you are staying on rent.
● Also the first three year interest amounts are combined together and distributed evenly among the next five year installments, which can be claimed with an yearly exemption limit of 1.5 lakh on both interest amounts combined (past three years + current year). Therefore opting for an under construction property with high final cost is not advisable as the interest rate limits are filled up easily and could have a net loss in terms of taxation.
What if the project is not completed within three years?
Is the taxpayer liable to pay the tax thereon? As per the law, any delay in completion beyond three years results in loss of enhanced interest deduction. However, one can avail certain benefits under the relief provision (Section 54/54F), which as per the courts should be viewed liberally.
● If taxpayer has acquired substantial rights over new house and has made substantial payment towards cost of construction within a period specified under section 54/54F, then taxpayer can claim for exemption, even if construction of building is not completed within a specified period.
● However, one needs to remember that the court needs to be satisfied that the sales consideration was used for investment in the new residential house.
A Point to Remember: Apart from the above calculations, if a buyer is interested in acquiring a primary space for residence (i.e. First home buyer), he would mostly end up paying extra costs for rental outgo in the case of under construction property, which would shoot up the net cash outflow and make it less viable for the value of money.
Do share your experience (good or bad) about buying an under construction or a ready to move in property with us.
Project Completion Cycle