House property income allows some deductions from the total taxable income like standard deduction, the deduction for municipal taxes paid , home loan interest paid deduction and ‘Pre-construction interest’ paid deduction. Such deductions allow a taxpayer to reduce the tax outflow from their taxable income.
Let us learn more about ‘pre-construction interest’ and how can we claim it.
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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.
In short:
Particulars | FY 2018-19 | FY 2019-20 | FY 2020-21 |
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 2020-21:
Total interest on home loan is Rs 72,000 for FY 2020-21. 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 2020-21. He must remember not to sell this property in the next five years. The amount claimed under Section 80C will be added back to his income in the year of sale and he will be taxed accordingly if the property is sold within five years from the date of completion of construction/obtaining possession.
Now let’s look at interest paid when the house was under construction:
So Prakash can claim Rs.72,000 (interest of FY 2020-21) + Rs.42,000 = Rs.1,14,000 as deduction towards interest from home loan in FY 2020-21.
All said and done, one needs to bear in mind that :
The income tax act allows to claim the pre-construction interest from the date of borrowing of loan till the 31st March before the end of the financial year in which the construction gets completed.
Pre-construction interest is allowed to be claimed for under construction residential property under the section 24 of the Income tax act
Income tax act allows to claim pre-construction interest only after the construction is completed in 5 equal installments.Also only interest component can be claimed as deduction on completion of construction.
Click here to read more about home loan deductions
How to calculate income from house property