Budget 2021 update :It has been proposed to exempt the senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce the banks to deduct tax on senior citizens more than 75 years of age who have a pension and interest income from the bank.

What is Pre-Construction Interest?

House Property and Taxes

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.

Read this example to understand how it can be claimed.

Prakash took a loan of Rs.20 lakhs to start construction of his house property in Bhubaneshwar in July 2016. He has been paying EMI of Rs.30,000 ever since. The construction was completed in August 2018 and he received a completion certificate. This house has been on rent from September.

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 2018-19.

Let’s start with his EMI payments this year:

  • Prakash pays a total EMI of Rs. 6,30,000 in total from July 2016 till 31 march 2018. For the FY 2016-17, 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 2017-18, Rs 2,40,000 goes towards principal repayment and Rs 1,20,000 is paid towards interest.
  • For the FY 2018-19, Rs 1,68,000 is paid towards principal repayment and Rs 72,000 is paid towards interest.
  • Total interest on home loan: Rs 90,000 for FY 2016-17 and Rs 1,20,000 for FY 2017-18, totalling to Rs 2,10,000. This entire interest paid till 31 March 2018 preceding the financial year of completion of construction is pre-construction interest. Since the property is rented out, he can claim the entire interest as deduction.
  • Prakash can claim a deduction for principal repayment of Rs.21,000 under Section 80C from the FY 2018-19. 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 pre-construction period.
  • 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.
  • Here the pre-construction EMI payment will be calculated for 21 months between July 2016 to March 2018 as under:
    FY 2016-17 – July 2016-March 2017 >> 30,000 X 9 = 2,70,000
    FY 2017-18 – April 2017-March 2018 >> 30,000 X 12 = 3,60,000
    This adds up to Rs 6,30,000.
  • The total EMI payment included principal repayment of Rs 4,20,000. Subtract this to arrive at pre-construction interest.
  • Rs.6,30,000 – Rs.4,20,000 = Rs.2,10,000 is the pre-construction interest that can be claimed in five equal installments of Rs.42,000 starting from FY 2018-19.

So Prakash can claim Rs.1,08,000 + Rs.42,000 = Rs.1,50,000 as deduction towards interest from home loan in FY 2018-19.

All said and done, one needs to bear in mind that from FY 2017-18, the loss from house property that can be set off against other heads of income has been restricted to Rs 2,00,000

Click here to read more about home loan deductions

Finish your E-filing for FREE with ClearTax

  • ClearTax makes it very easy to E-File your ITR
  • E-Filing takes only a few minutes
  • Our experts help you on live chat and email

Start your Tax Return Now

Make Small Investments for Bigger Returns

Start Investing Now