What is Pre construction Interest?

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Hiral Vakil

Income from House Property
Income Heads
Income Tax
ITR-2

The pre construction period is from the day of approval of home loan until the day of completion of the construction of house property. 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 5 equal installments starting from the year in which the construction of the property is completed.

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How to calculate Pre construction Interest?

  1. Calculate the Pre construction period of constructed house property.

    It is from the year of home loan taken till the year in which construction is completed. However, the interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.

  2. Calculate the interest paid during the pre-construction period from the interest certificate issued by the bank.

    Each year the lending bank issues an annual home loan certificate which provides details of total EMI paid along with Interest and Principal Repayment.

  3. Divide the total pre construction interest in 5 equal installments.

    Claim the deduction of pre-construction interest from the financial year of completion of construction while filing ITR on the Income Tax e-Filing portal under the head “Income from House Property”.

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Example

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 2017
EMIRs. 25,000
Construction completed inDecember 2019

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 can claim for this home loan while filing his return for the FY 2019-20.

As discussed earlier, the homeowner can claim interest deduction from the year in which the construction of the property is completed. Hence Kunal will be able to claim deduction on Pre-construction interest from the FY 2019-20.

Calculation of EMI payments for FY 2019-20

Calculation of amount paid for Pre-construction interest

Financial yearPeriodEMI calculation
2017-18November 2017 to March 2018Rs. 25,000 x 5 = Rs. 1,25,000
2018-19April 2018 to March 2019Rs. 25,000 x 12 = Rs. 3,00,000
Total
= Rs. 4,25,000

So Kunal will be able to claim Rs. 1,65,000 + Rs. 46,750 = Rs. 2,11,750 as deduction towards home loan interest in FY 2019-20.

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FAQs

What is pre construction period in income tax?

The period from borrowing money until construction of the house is completed is called the pre construction period. Interest paid during this time can be claimed as a tax deduction in five equal installments starting from the year in which the construction of the property is complete.

What is the maximum limit of interest on housing loan exemption?

Under Section 24 of the Income Tax Act, an individual can claim tax deduction of the interest payment on the housing loan up to a maximum amount of Rs. 2,00,000. However, there is no limit on the interest payment deduction of the property is rented.

Can the husband and wife both claim interest on the housing loan?

Each joint owner/ co-owner and a borrower can claim Rs 2 Lakhs interest deduction – In case of a joint home loan for self-occupied house property, each of the owners can claim Rs 2 Lakhs in their tax return. The total interest is allocated between them based on their share of ownership.

Which ITR needs to be filed for claiming pre construction interest?

The taxpayer can file ITR-1 if no co-owner is present. Otherwise, you need to file ITR-2.

  • Court Harris says:

    Love what you said about “What is Pre construction Interest?”
    Thanks for sharing this article I really liked this article and enjoyed very much while reading.
    I am gonna share this article on my website which is about preconstruction services
    keep sharing more like this.
    cheerssss!!!

  • Giridhar says:

    Hiral your post is simple and to the point…thanx

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