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Deduction for Pre-construction Interest – House property income

A case study on deduction for pre-construction interest

Updated on:  

08 min read

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.

Latest Updates:

Union Budget 2021 Outcome-
The deduction for interest on housing loans under section 80EEA is to be extended to loans taken up to 31st March 2022.

Union budget 2019 Outcome-
The taxpayers are allowed to declare the value of ‘two houses’ as self-occupied as against one house allowed previously.

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 2018. He has been paying EMI of Rs.30,000 ever since.
  • The construction was completed in August 2020 and he received a completion certificate.
  • This house has been on rent since September 2020. 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 2020-21.
  • Prakash pays a total EMI of Rs. 6,30,000 in total from July 2018 till 31 March 2020. For the FY 2018-19, total EMI payments are Rs.30,000 X 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 2019-20, Rs 2,40,000 goes towards principal repayment and Rs 1,20,000 is paid towards interest.
  • For FY 2020-21, Rs 1,68,000 is paid towards principal repayment and Rs 72,000 is paid towards interest.

In short:

ParticularsFY 2018-19FY 2019-20FY 2020-21
Principal repayment1,80,0002,40,0001,68,000
Interest repayment90,0001,20,00072,000
Total2,70,0003,60,0002,40,000

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:

  • 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 2018-19 and Rs 1,20,000 for FY 2019-20, totaling 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 2020-21.

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 loss from house property that can be set off against other heads of income has been restricted to Rs 2,00,000
  • the benefit of claiming Rs 2 lakhs will get reduced to Rs. 30,000 if 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.

Frequently Asked Questions

How do I claim pre-construction interest?

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.

Under which section you can claim pre-construction interest?

Pre-construction interest is allowed to be claimed for under construction residential property under the section 24 of the Income tax act

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 interest component can be claimed as deduction on completion of construction.

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