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Deduction for Pre-Construction Interest - House Property Income

Updated on: Jun 5th, 2024

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10 min read

House property income allows some deductions from the total taxable income like standard deduction, the deduction for municipal taxes paid, deduction on home loan interest paid, and ‘Pre-construction interest’ paid. Such deductions allow a taxpayer to reduce the tax outflow from their taxable income.

Let us learn more about ‘pre-construction interest’ under section 24(b) and how can we claim it.

Latest Updates:

Deduction under section 24(b) for pre-construction interest cannot be claimed as a deduction if you are opting for a new tax regime in the case of self-occupied property.

What is Pre-Construction Interest?

Pre-construction interest is the interest that an assessee pays while the residential house is under construction.
Deduction on home loan interest cannot be claimed when the house is under construction. This pre-construction interest can be claimed only after the construction is finished.

Example To Understand How To Claim Pre-Construction Interest. 

  • Prakash took a loan of Rs.20 lakhs to start construction of his house property in Bhubaneshwar in July 2021. He has been paying EMI of Rs.30,000 ever since.
  • The construction was completed in August 2023, and he received a completion certificate.
  • This house has been on rent since September 2023. Prakash is not sure how he can claim a deduction on interest for the home loan in his income tax return.
  • Homeowners can claim the deduction on interest for the home loan only from the year in which the construction of the property is completed. In this case, Prakash can claim it from FY 2023-24.
  • Prakash pays a total EMI of Rs. 6,30,000 in total from July 2021 till 31 March 2024. For the FY 2021-22, total EMI payments are Rs.30,000×9= 2,70,000, of which Rs 1,80,000 is paid towards principal repayment and Rs 90,000 is paid towards interest.
  • For the FY 2022-23, Rs 2,40,000 goes towards principal repayment, and Rs 1,20,000 is paid towards interest.
  • For FY 2023-24, Rs 1,68,000 is paid towards principal repayment, and Rs 72,000 is paid towards interest.

In short:

Particulars

FY 2021-22

FY 2022-23

FY 2023-24

Principal repayment

1,80,000

2,40,000

1,68,000

Interest repayment

90,000

1,20,000

72,000

Total

2,70,000

3,60,000

2,40,000

Let’s start with his EMI payments for FY 2023-24:

The total interest on a home loan is Rs 72,000 for FY 2023-24. Since the property is rented out, he can claim the entire interest as a deduction.

Also, Prakash can claim a deduction for principal repayment of Rs 1,50,000 (Rs 1,68,000 or Rs 1,50,000, whichever is less) under Section 80C from FY 2023-24. 

Now let’s look at the interest paid when the house was under construction:

  • The period from borrowing money until 31 March immediately preceding the year of completion of construction of the house is called the pre-construction period.
  • The pre-construction interest deduction is allowed for interest payments made from the date of borrowing till March 31st before the financial year in which the construction is completed.
  • Total interest on home loan: Rs 90,000 for FY 2021-22 and Rs 1,20,000 for FY 2022-23, sums up to Rs 2,10,000. 
  • Rs 2,10,000 is the pre-construction interest that can be claimed in five equal installments of Rs.42,000 starting from FY 2023-24.

So Prakash can claim Rs.72,000 (interest of FY 2023-24) + Rs.42,000 = Rs.1,14,000 as a deduction towards the interest from the home loan in FY 2023-24.

All said and done, one needs to bear in mind that :

  • Maximum deduction on interest on housing loan for self-occupied house property is limited to Rs 200,000.
  • In the case of let-out property, there is no such threshold limit however, loss from house property that can be set off against other heads of income has been restricted to Rs 2,00,000.
  • Pre-construction interest deduction is included in the above threshold limit of Rs. 200,000 (Self-occupied). Thus if your current year interest itself exceeds Rs 200,000, then you will not be eligible to get any additional deduction. In the case of let-out property, since there is no such threshold, you can get benefit even if the amount exceeds the limit of Rs 200,000 however, set off against other heads will be limited to Rs 200,000.  If there is any excess loss, you will be eligible to carry forward the loss to next year.
  • The benefit of claiming Rs 2 lakhs will be reduced to Rs. 30,000 if the property is not acquired or construction is incomplete within 5 years from the end of the financial year in which the home loan is availed.

Where to Claim Pre-construction Interest in ITR Form?

You can claim the Interest on the housing loan or Pre-construction interest on the housing loan in Schedule HP of your ITR form (ITR 1,2,3,4) under Interest payable on borrowed capital

schedule HP- pre-construction interest

Related Articles

Click here to read more about home loan deductions

How to calculate income from house property

Deductions from House property income

Home loan tax benefits

Frequently Asked Questions

How do I claim pre-construction interest?

The Income-tax Act allows one to claim the pre-construction interest from the date of borrowing of the loan till the 31st March before the end of the financial year in which the construction gets completed.

Under which section you can claim pre-construction interest?

Pre-construction interest is allowed to be claimed for under-construction residential property under section 24 of the Income-tax act. This can be claimed only after the construction is complete over a period of 5 years.

Is pre-EMI fully taxable?

Income-tax act allows to claim pre-construction interest only after the construction is completed in 5 equal installments. Also, only the interest component can be claimed as deduction on completion of construction.

Difference between pre-EMI and pre-construction?

Pre-EMI Interest is a banking terminology. This is the interest component before the EMI on such a loan has started. 

Pre-Cconstruction Iinterest is the time period till the preceding financial year in which construction is completed. This is relevant under Income tax act to claim a deduction under Section 24(b).

Thus both Pre-EMI and Pre-construction interests are different and cannot be considered one and the same.

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Quick Summary

House property income allows deductions like pre-construction interest. Prakash claimed Rs. 1,14,000 as a deduction under Section 80C from FY 2023-24. Consider maximum deduction limits. Pre-construction interest can be claimed in five installments, starting from FY 2023-24. Remember to claim in ITR Form under Schedule HP.

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