In some cases money may be borrowed (home loan) prior to the acquisition or construction of the property. In such a case, what is the tax treatment of interest paid/payable before the final completion of construction or acquisition of the property(pre-construction period) under Income Tax Act/Rules.
What is the Tax treatment of Pre-construction period Interest ?
The interest paid can be claimed as deduction only after the property is ready for possession. Any interest paid before possession is tax deductible in five instalments and allowed for five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilised for repairs, renewal or reconstruction. It is also subject to a cap of Rs 2 lakh if the property is self-occupied. Hence, if you get the possession by the end of March 2022, you can claim deduction for interest from the current financial year. Additionally, a deduction of Rs 1.5 lakh is also available u/s 80 EEA for interest paid on loan for purchase of a house that has stamp duty value not exceeding Rs 45 lakh and the loan is availed during 2020-21. The benefit is available only on first residential property. You cannot claim any of the deductions if you opt for the new regime of taxation u/s 115 BAC of the IT Act.
Frequently Asked Questions
How do I claim pre-construction interest?
The income tax act allows one to claim the pre-construction interest from the date of borrowing of loan till the 31st March before the end of the financial year in which the construction gets completed.
Under which section can you claim pre-construction interest?
Pre-construction interest is allowed to be claimed for under construction residential property under the section 24 of the Income tax act
Is pre-EMI fully taxable?
Income tax act allows to claim pre-construction interest only after the construction is completed in 5 equal installments. Also only interest component can be claimed as deduction on completion of construction.
