Tax Benefits on Home Loan Interest for Under Construction Properties - Home Loan Blog - Tata Capital

Tax Benefits on Home Loan Interest for Under Construction Properties

Mar 07, 2017

If you have taken a loan to pay for your self-occupied property, you may know about the available tax benefits. You receive a tax deduction on the interest component of up to INR 2 lakh per annum under Section 24 of the Income Tax (IT) Act, 1961. In addition, a principal repayment of INR 1.5 lakh is eligible for tax deductions under Section 80C of the IT Act.

However, the aforementioned tax benefits are only available for completed projects. These are unavailable if you purchase an under construction home even if you have taken a loan to fund your acquisition.

Moreover, if you avail of a home loan when you purchase an under construction property, the Equated Monthly Installment (EMI) will begin immediately on the disbursal of the loan amount. However, you may receive possession of your property later.

Interest paid during the construction period

Under Section 24 of the IT Act, 1961 no deduction on tax may be claimed on the interest paid if the construction is not complete. However, you are allowed to claim deductions on the pre-construction interest in five equal installments. The first installment commences in the year when you receive possession of your property.

Understanding the following two factors would help you determine the pre-construction interest.

1. Under construction periodt

Also known as the prior period, it refers to the time between borrowing date of your home loan and the end of the financial year. It is the period that precedes the year in which you acquired the property or received possession of the completed home. The time between the date of your borrowing and the end of the construction is known as the under construction period.

2. Pre-construction period interest

It is also referred to as prior period interest (PPI). It includes the interest paid on the loan from the date of borrowing to the year in which the construction is completed. In other words, it is the interest paid during the under construction period.

Here are the steps for calculating pre-construction period interest.

  • Determine the date of your borrowing
  • Identify the completion or possession date
  • Check the last date of the previous financial year preceding the possession or completion date
  • Determine the prior period
  • Analyze the interest paid during the pre-construction period
  • Calculate the allowable prior period interest (APPI), which is calculated by dividing the pre-construction interest into five installments

If you receive possession during the financial year, the tax deduction includes two components. You receive the benefits on pre-construction interest plus the normal home loan interest deduction. However, the total benefits for both these components must not exceed INR 2 lakh as limited under Section 24 of the IT Act, 1961. It is important to keep in mind that if you rent out the property, there is no maximum ceiling on the annual interest tax deductions available under this section.