Home loan interest exemption on under-construction property

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For an under-construction house, the tax treatment of home loan interest is a bit different from a ready-to-move property.

Not deductible during construction. It’s Called Pre-construction Interest. You cannot claim interest deduction U/s 24(b) until the construction is complete.
Once construction is completed (i.e., you get possession or the completion certificate), the total interest paid during the construction period can be claimed in five equal annual instalments.
The first instalment is claimable in the year in which construction is completed/possession is taken.
We can understand via example like Suppose you paid INR 4,00,000 interest during construction (Duration of 2019–2024). Construction completed in FY 2024-25. From FY 2024-25 onwards, you can claim INR 80,000 (i.e., 1/5th of INR 4,00,000) each year in addition to the regular interest of that year.

Once the house is completed, you can claim the regular annual interest on home loan (subject to limits):

Pre-construction interest : claimable in 5 equal instalments starting from the year of completion/possession.
Self-occupied property: Maximum deduction of INR 2,00,000 per year U/s 24(b). For a self-occupied house, the total deduction (current year + pre-construction portion) is capped at INR 2 lakh per year.
Let-out property: No maximum cap; you can claim the entire interest (but set-off of loss under “House Property” is limited to INR 2,00,000 against other heads in a year, balance carried forward for 8 years). For a let-out house, the entire interest is allowed (no cap, but set-off limited to INR 2 lakh per year; balance carried forward).

For self-occupied house : deduction restricted to INR 30,000 per year (including pre-construction interest).
For let-out house : full interest allowed (same set-off rule as above).

Deduction for principal repayment U/s 80C (up to INR 1.5 lakh) is available only after construction is completed and possession is taken.
Construction should be completed within 5 years from the end of the financial year in which the loan was taken.
If not completed within this period, the maximum deduction for self-occupied property reduces from INR 2,00,000 to INR 30,000 per year.

Cost of acquisition: Can include the interest paid on the home loan (if not already claimed as deduction).
Capital gains: Exemption possible U/s 54 if reinvested in another house property, subject to conditions.

You get tax benefit on interest only after possession, not during construction. No deduction allowed during construction. After completion:

- Pre-construction interest: Claim in 5 equal instalments.
- Regular interest: INR 2 lakh max (self-occupied), full amount (let-out).
- The 5-year rule is crucial: finish construction within 5 years to enjoy the INR 2 lakh benefit (instead of just INR 30,000).
- Principal: Section 80C benefit available