If you have earned income under the head house property, then you should know about these deductions from the total taxable income, such as the standard deduction, the deduction for municipal taxes paid, the deduction on home loan interest for the current period, and the ‘Pre-construction interest’ incurred prior to completion of acquisition/construction. Such deductions allow a taxpayer to reduce the tax outflow from their taxable income.
Let's learn more about ‘pre-construction interest’ under section 24(b) and how to claim it.
Latest Updates:
Deduction under Section 24(b) for pre-construction interest (in 5 equal instalments over a period of 5 years) cannot be claimed if you are opting for a new tax regime in the case of self-occupied property.
In the case of let-out property, the pre-construction interest can continue to be claimed as a deduction u/s 24(b) even if you opt for the new regime.
What is Pre-Construction Interest?
Pre-construction interest is the interest that an assessee incurs while the house property is under construction.
Deductions on home loan interest cannot be claimed when the house is under construction. This pre-construction interest is to be accumulated and can be claimed only after the construction is finished. (i.e., an Occupancy Certificate is received for the house property).
Conditions to Claim Deduction Pre-Construction Interest
The following are the conditions to claim a deduction of pre-construction interest:
- The loan should be taken for the purpose of acquisition or construction of house property.
- The construction of house property should be completed within 5 years from the end of the financial year in which the loan was obtained.
- No deduction should have been made for the interest under any other section.
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 unsure how he can claim a deduction on interest for the home loan in his income tax return.
- Prakash 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 paid a total amount of Rs. 6,30,000 in EMI from July 2021 till 31 March 2023. 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 2,40,000 is paid towards principal repayment, and Rs 1,20,000 is paid towards interest.
In short:
Particulars | FY 2021-22 | FY 2022-23 | FY 2023-24 |
Principal repayment | 1,80,000 | 2,40,000 | 2,40,000 |
Interest repayment | 90,000 | 1,20,000 | 1,20,000 |
Total | 2,70,000 | 3,60,000 | 3,60,000 |
Let’s start with his EMI payments for FY 2023-24:
The total interest on a home loan is Rs 1,20,000 for FY 2023-24. Since the property is rented out, he can claim the entire interest as a deduction u/s 24(b).
Also, Prakash can claim a deduction for principal repayment of Rs 1,50,000 (Rs 2,40,000 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 2023 i.e., immediately preceding the year of completion of construction of the house is 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 pre-construction 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.1,20,000 (interest of FY 2023-24) + Rs.42,000 = Rs.1,62,000 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. 2,00,000.
- 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 in a financial year. Excess loss, if any can be carried forward to future years.
- Pre-construction interest deduction is included in the above threshold limit of Rs. 2,00,000 (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 the row - Interest payable on borrowed capital
Related Articles
Click here to read more about home loan deductions
How to calculate income from house property