Categories: Direct Tax

Home loan interest exemption on under-construction property

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

Interest During Construction (Pre-Construction Interest)

  • 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.

After Construction Completion – Regular Interest (Post-Construction Interest)

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

  • If completed within 5 years (from end of the FY in which loan was taken):

  • 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).
  • If completed after 5 years:

  • 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).

Principal Repayment

  • 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.

When Under-Construction House is Sold

  • 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.

Home Purchase: Buy in Cash vs Take a Home Loan

Aspect Buy in Cash Take a Home Loan
Pros – No EMI burden
– Peace of mind
– No interest cost
– Immediate ownership
– No rate hike risk
– Strong negotiating power
– Liquidity safety
– Tax benefits (₹2L interest u/s 24 + ₹1.5L principal u/s 80C)
– Inflation advantage
– Potential higher returns
Cons – Savings locked in one asset
– Missed investment returns
– Limited emergency liquidity
– EMI stress (~₹86k/month)
– Interest outgo ~₹1.07 crore
– Risk if investments underperform
– Income dependency
EMI Nil ~₹86,000/month
Total Outgo ₹1 crore (house value) ~₹2.07 crore (principal + interest)
Tax Impact No tax benefits Deduction up to ₹3.5 lakh/year

Recommendation Guide on Buy in Cash vs Take a Home Loan

Buy in Cash If:

  • Person are risk-averse or nearing retirement
  • In case Person value peace of mind and debt-free living
  • Person want to avoid EMI burden and interest costs

Take a Home Loan

If  person are young (<40) with stable income & person can invest remaining savings smartly (e.g., equity, mutual funds, business)

In Summary:

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
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Rajput Jain & Associates is a Chartered Accountants firm, with it's headquarter situated at New Delhi (the capital of India). The firm has been set up by a group of young, enthusiastic, highly skilled and motivated professionals who have taken experience from top consulting firms and are extensively experienced in their chosen fields has providing a wide array of Accounting, Auditing, Taxation, Assurance and Business advisory services to various clients and their stakeholders. Rajput jain & Associates, a professional firm, offers its clients a full range of services, To serve better and to bring bucket of services under one roof, the firm has merged with it various Chartered Accountancy firms pioneer in diversified fields. We have associates all over India in big cities. All our offices are well equipped with latest technological support with updated reference materials. We have a large team of professionals other than our Core Team members to meet the requirements of our prospective clients including the existing ones. However, considering our commitment towards high quality services to our clients, our team keeps on growing with more and more associates having strong professional background with good exposure in the related areas of responsibility.

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