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.

Home Construction

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 propertyDuring 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.

How to calculate Pre-Construction Home Loan Interest for IT deduction purpose?

22 thoughts on “How to calculate Pre-Construction Home Loan Interest for IT deduction purpose?

  • July 7, 2014 at 3:01 PM
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    I purchased a house and loan was sanctioned in FY 2010-11. Date of completion of the house was 2012-13 and so pre-construction period is 2010-13. However, I did not claim rebate on pre-construction interest in assessment year 2013-14 but filed only IPR-1 due to non-availability of possession certificate at that time. Now I want to claim rebate on pre-construction home loan interests. My query is whether I can file ITR-2 (revised or belated) for AY 2013-14 and under which sections. As past interest can be claimed over a period of 5 years, where in ITR should I fill 20% interest?
    Thanks a lot.

    Reply
    • July 7, 2014 at 7:08 PM
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      Hi Sohi,

      If your ITR for the FY 2012-13 is already submitted and received/processed at IT Dept. then I don’t thing you can file any revised or belated returns for the same. For the current assessment year i.e. 2014-15 you can show interest paid for the FY 2013-14 along with 1/5th (or 20%) of pre-construction interest paid to claim deduction u/s 24b. If the said house property is the only house property where you need to claim deductions or show income then you can still use ITR 1, else ITR2.

      Reply
  • July 31, 2014 at 9:20 PM
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    Mine is similar case as Sohi, While filing IT returns should one then mention these pre-construction interest for earlier years in worksheet CFL of ITR-2?
    for earlier years’ ITR-2 if if I did not mention the losses can I mention them in later ITR-2 against each of the previous years.

    Reply
    • July 31, 2014 at 9:49 PM
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      Hi Dev,

      Undeclared losses (interest paid post construction) can not be claimed in subsequent or later FYs. But you may add 1/5th of per-construction interest once in each FY for five years only.

      Reply
  • July 31, 2014 at 11:18 PM
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    I have two houses: House-1 & House-2. Actually, House-1 is self occupied and House-2 is vacant. Can I consider House-1 is letout & House-2 is self – occupied while filing Income Tax return?

    Reply
    • July 31, 2014 at 11:35 PM
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      Hi Ajaygosh,

      Yes! Of course.

      Reply
  • August 12, 2014 at 12:37 PM
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    Hi,
    Will this be allowed for two under construction houses, if both are getting possession within same year? House 1 purchased loan start 2009 and house 2 purchased loan start 2013. Both house 1 and 2 possession received in August 2014. (Both considered as deemed Let Out).
    Please help with guidance.
    Thanks,

    Reply
    • August 12, 2014 at 8:13 PM
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      Hi Parry,

      Yes. But do note, if you already own house property and these new properties are left vacant for the FY then these can be considered as deemed to be let-out. Else you can not consider these two as deemed to be let-out.

      Reply
  • September 24, 2014 at 12:48 AM
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    Hi

    As per the given example if Property construction completes in Sep’13, then the period from Dec’10 to 31 Mar 13 is pre-construction period.

    So all 3 annual interests [FY 2010-11= Rs. 1,33,000 (December to March), FY 2011-12= Rs. 3,94,000, FY 2012-13=Rs. 3,87,000] should be summed up and divided into 5 equal installment for claim from FY 2013-14 (1 Apr 2013 to 31 Mar 2014) onward for 5 years up to FY 2017-18 (1 Apr 2017 to 31 Mar 2018).

    This needs correction.

    1. Also do we consider the completion date of builder flat to be the Possession Certificate date from the builder?

    2. Does the house must be constructed with in 3 FYs after the FY when the home loan was disbursed in all cases to avail benefit u/s 24 OR does it only apply in case of Self-Occupency?

    Manish

    Reply
    • September 25, 2014 at 7:32 PM
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      Hi Manish,

      Answers in sequence to your queries;
      1. Yes
      2. This is the rule as of now and applicable to Self-Occupied house property.

      Reply
  • September 24, 2014 at 12:50 AM
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    My query about rebate u/s 24 is about the exemption limit being 30,000 only instead of 2 Lacs in case house construction takes more than 3 years.

    Reply
    • September 27, 2014 at 9:35 AM
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      Hi Manish,

      It will be Rs. 30,000 in that case.

      Reply
  • November 26, 2014 at 3:40 PM
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    My query is- suppose if the date of borrowing is 1st July,2010 n date of completion of construction is 30th November,2011
    Wts the pcp interest in this case???

    Reply
    • November 28, 2014 at 8:12 AM
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      Hi Sneha,

      In this case the pre-construction period of interest paid would be starting from July 1, 2010 upto March 31, 2011.

      Reply
  • January 18, 2015 at 1:14 AM
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    My EMI had started from 1st April 2013 and i got a project completion letter from developer on December 2014. In between these period I have paid around 4 Lacs interest. I am planning to move to my home from April 2015 . Till march 2015 i’ll continue to stay on rent.
    I have a below question.
    – As i am staying in a rented house , so i’ll claim HRA. While claiming the HRA can i claim the 1/5th part (i.e 80 K) of the EMI i paid so far in this financial year?

    Reply
    • January 29, 2015 at 10:33 AM
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      Hi Sanky,

      Since completion of the project is during FY 2014-15, your pre-construction period will be upto 31st March 2014. So it goes these way, 1/5th of total interest paid upto 31st March 2014 plus total interest between 1st April 2014 & 31st march 2015. This you can claim for the assessment year 2015-16 i.e. for the financial year 2014-15.

      Reply
  • February 4, 2015 at 1:44 PM
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    My query is what is the exact date of home loan disburshed whether

    1 Date of Sanction of Loan or
    2.Date of First Disbursement or
    3. Date of Last installment disbursed

    Reply
    • February 6, 2015 at 9:42 AM
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      Hi Rajesh,

      It is basically the date of first disbursement, but may not be the answer to your query because there are chances that disbursement happen in various installments as per the need.

      Reply
  • February 19, 2015 at 11:06 AM
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    What if the property is sold in the year it got possession. Can a person still claim 1/5th pre emi interest even if he is not the owner of the property in subsequent years ? or the interest which he paid during construction period is unclaimable?

    Reply
    • February 19, 2015 at 4:01 PM
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      Hi Vishal,

      Answer is Yes! It should be allowed. If you see the terms for 1/5th of pre-construction interest claims, no where it is specifically mentioned that assessee should hold the house property in the same year in which he is claiming deduction u/s 24b towards interest paid for the periods before construction completed.

      Reply
  • August 17, 2015 at 12:51 PM
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    Dear Sir
    I took Home loan on 18th September 2012 for a under construction flat. the flat will be possibly ready for possession in Dec 2015. whether I will be eligible to get deduction of 200000/-. What should be the last date of possession of getting the deduction. thank you

    Reply
    • August 18, 2015 at 10:04 PM
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      Hi Somvanshi

      As per the condition, the possession date should be within 3 years from the end of the financial year in which capital was borrowed. In your case, the date should be March 31, 2016 or before.

      Reply

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