Tax Deduction On Pre-Construction Interest

While an individual is eligible for tax deduction on pre-construction interest of up to Rs.2 lakh in a year, he or she can claim the interest deductions only from the year the construction of the property in question is completed.

A pre-construction period is basically the period between the date on which a loan was taken, to March 31 of the year which immediately precedes the year in which the property is completely constructed. Individuals who have taken a home loan cannot claim a deduction on the interest until the property has been completely constructed. Here is a case study to better understand how to claim a deduction on pre-construction interest:

Aakash, a resident of Pune, borrowed Rs.20 lakh as a home loan to construct a house property. The loan was taken in August 2014. The EMI (Equated Monthly Instalments) paid by him since taking the loan is Rs.18,000. The property was completely constructed in September 2016, and Aakash was issued a certificate of completion. In October 2016, he let the house on rent. Aakash is now wondering how to go about his IT returns and claim a deduction.

Since homeowners are allowed to claim deductions on the interest rate applicable to their home loan only once the property is completely constructed, Aakash can start claiming his deduction from the financial year 2016-17.

In the financial year 2015-16, the overall EMI payments made by Aakash amounted to Rs.2.16 lakh (Rs.18,000 x 12 months). Out of this amount, Rs.14,000 is repaid as the principal. The overall interest, in essence, is Rs.2.02 lakh. Given that Aakash has let the property out to rent, the whole amount paid as interest can be claimed as a deduction. However, the property cannot be sold for the following 5 years. In case he sells the property within 5 years, the amount he claims as deduction under Section 80C of the Income Tax Act will not be refunded to him during the year in which he sells the house.

A deduction on pre-construction interest can be claimed for the interest paid between the date on which the loan was borrowed to March 31 of the year which precedes the fiscal year in which the property is completely constructed. The EMI payment for the pre-construction period shall be computed for the 20 months between August 2014 and March 2016.

For the financial year 2014-15, the total EMI payment shall be Rs.18,000 x 8 months = 1.44 lakh.

For the financial year 2015-16, the total EMI payment shall be Rs.18,000 x 12 months = Rs.2.16 lakh.

The total amount of money paid by Aakash as EMIs for this period amount to Rs.3.6 lakh.

The total principal repayment amount, which is included in the overall EMI payment, is Rs.24,000. This amount should be deducted in order to determine the pre-construction interest. Therefore, the pre-construction interest shall be Rs.3.6 lakh – Rs.24,000 = Rs.3.36 lakh. Aakash will be allowed to claim this pre-construction interest in 5 equal instalments (Rs.67,200) from the financial year 2016-17.

The total amount that Aakash can claim as a deduction in the financial year 2016-17 will be Rs.2.02 lakh + Rs.67,200 = Rs.2,69,200. However, starting from the financial year 2017-18, Aakash can claim only Rs.2 lakh as a deduction as it is the new limit for loss from house property.

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