Did you know that you can claim pre-construction interest as a deduction along with the interest paid towards home loan outstanding for a particular financial year? I am sure you are! You might have taken a loan before acquiring a house property or construction of the same. Once the construction is completed, any interest paid prior to such completion of construction or acquisition of the property will be aggregated and allowed as deduction for five successive financial years starting with the year in which the acquisition or construction is completed.
Let us understand this with an example: Suppose you took a loan of Rs. 35,00,000/- at certain rate of interest in April, 2004 from a Bank for the purpose of construction of a house property. The construction got completed in April 2006 and you put the house on rent since then. Before the construction completes you paid total interest on the borrowed capital (i.e. on the outstanding loan amount) of around Rs. 2,00,000/- which is during for F.Y. 2004-2005 and FY 2005-06. As the provision explained above, you can claim a deduction in respect of this interest of Rs. 2,00,000/- (Over and above the yearly interest paid) in five equal instalments of Rs. 40,000 i.e [Rs. 2,00,000÷5] each starting from the assessment year 2007-08 (financial year 2006-07).
But remember, this deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction. There are few things you need to understand before calculating such pre-construction interest. You might get confused it with the concept of banks Pre-EMI Interest.
What is Pre EMI Interest as Per Bank?
If you look into a bank final or provisional home loan statement, you may find something “Pre-EMI interest”, but such Pre-EMI interest term given in Loan Statement is not necessarily same meaning as pre construction period as per Income Tax Act. As per Bank Pre -EMI interest means, interest due up to the start of payment of First Instalment. So term used in Bank statement or loan certificate is not similar as defined in Income Tax Act.
Then what is that as per Income Tax Act Pre-Construction period means?
It’s very simple! Total interest paid up to the end of financial year, immediate proceeding to the year in which house is completed. For example: a loan was taken on December 2010 and the construction of the house gets completed on September 20, 2013, in that case pre -construction Interest is taken from December 2010 to March 2013. Fyi, even if house is completed on March 31, 2014 then also the pre-construction Interest is considered from December 2010 to March 2013.
Let us assume the loan amount was Rs. 40,00,000 in December 2010 @ 10% pa for 20 years tenure for repayment. The house got completed in September 2013. So the year wise interest may be;
FY 2010-11= Rs. 1,33,000 (December to March)
FY 2011-12= Rs. 3,94,000
FY 2012-13=Rs. 3,87,000
After completion if the house property has been let-out then as per section 24b the allowable deduction of interest for the assessment year 2014-15 (financial year 2013-14) will be; Rs. 4,92,400 i.e. pre construction period is December 2010 to March 2013 and pre-construction period Interest is Rs. 5,27,000 (Rs. 1,33,000 + Rs. 394,000) , and this deduction of the pre-construction period is divided in 5 instalments of Rs. 1,05,400 i.e. 1/5th of Rs. 5,27,000 and deduction will be allowed from FY 2013-14.
Thus, in FY 2013-14 interest allowed will be Rs. 3,87,000 plus Rs. 1,05,400 (1st instalment of pre-construction period), so total will Rs. 4,92,400. 1/5th amount of per-construction interest which is Rs. 1,05,400 will continue to be allowed in AY 2015-16, 2016-17, 2017-18 and 2018-19 as pre-construction period interest in addition to normal interest due in given assessment years.
But this must be noted whether the house property has been declared as self occupied or let-out for the financial year. Suppose, in FY 2013-14 the house property has been occupied by the borrower for own residential purpose then instead of getting deduction of Rs. 5,27,000,
it will be capped at Rs. 1,50,000 as self occupied house property. During Budget 2014-15, it has been announced effective from FY 2014-15, home loan borrowers paying interest towards self-occupied house property u/s 24b are eligible to claim deduction upto to Rs. 2,00,000 per years.
In above example suppose bank has granted and disbursed the Loan in December 2010, but EMI started from May 2011 then Interest from December 2010 to May 2011 is treated as Pre-EMI interest by the bank which you normally see in the home loan statement.