Pre-construction Interest: What is it? and How to calculate it?

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By Hiral Vakil on March 7, 2019

The period from taking loan until the completion of construction is called pre-construction period. The interest deduction is not allowed while the property is still under construction. However, the interest paid during the pre-construction, namely the Pre-construction Interest, is allowed as a deduction in five equal installments starting from the year in which the construction of the property is completed.

Let’s go through this example for better understanding.

Kunal has taken a loan for the construction of house property in Pune. Here are the loan details:

Loan amountRs. 30,00,000
Loan taken inNovember 2013
EMIRs. 25,000
Construction completed inDecember 2015

Right after the completion of construction, Kunal was able to find a tenant and so he gave the property on rent right away. Kunal wants to know how much tax deduction he claims for this home loan while filing his return for the FY 2015-16.

As discussed earlier, the homeowner can claim interest deduction from the year in which the construction of the property is completed. Since in this case the construction was completed in December 2015, Kunal would be able to claim the pre-construction interest from the FY 2015-16.

Calculation for EMI payments for FY 2015-16:

  • Total EMI payments in FY 2015-16 = Rs. 25,000 x 12 = Rs. 3,00,000. Out of this Rs. 3,00,000, Rs. 20,000 is towards principal repayment
  • This Rs. 20,000 will be allowed as deduction towards principal repayment, under section 80C of the income tax act.
  • So total interest payment for the FY 2015-16 comes to Rs. 2,80,000 and since the property is rented out, Kunal can claim the deduction for the entire interest amount.

Calculation for amount paid for Pre-construction interest:

  • As explained in the opening para, the pre-construction interest will be allowed in five equal installments from the year in which the construction is completed
  • The interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.
  • In this case, the construction is completed in December 2015 so the pre-construction interest will be calculated for 17 months for the period November 2013 till March 2015.
Financial yearPeriodEMI calculation
2013-14November 2013 to March 2014Rs. 25,000 x 5 = Rs. 1,25,000
2014-15April 2014 to March 2015Rs. 25,000 x 12 = Rs. 3,00,000
Total
= Rs. 4,25,000
  • Out of this Rs. 4,25,000, Rs. 30,500 is towards principal repayment.
  • So the remaining part of Rs. 3,94,500 (Rs 4,25,000 – Rs. 30,500) is the pre-construction interest which can be claimed in five equal installments of Rs. starting from FY 2015-16

So Kunal will be able to claim Rs. 2,80,000 + Rs. 78,900 = Rs. 3,58,900 as deduction towards home loan interest in FY 2015-16.