Deduction for Pre-construction Interest

August 18, 2018 0 By mkjjha1981

What is Pre-Construction Interest?

Deduction on home loan interest cannot be claimed when the house is under construction. This pre-construction interest can be claimed only after the construction is finished.

Read this example to understand how it can be claimed.

Prakash took a loan of Rs.20 lakhs to start construction of his house property in Bhubaneshwar in July 2014. He has been paying EMI of Rs.18,000 ever since. The construction was completed in August 2016 and he received a completion certificate. This house has been on rent from September.

Prakash is not sure how he can claim a deduction on interest for the home loan in his income tax return.

Homeowners can claim the deduction on interest for the home loan only from the year in which the construction of the property is completed. In this case, Prakash can claim it from FY 2016-17.

Let’s start with his EMI payments this year:

  • Prakash pays a total EMI of Rs. 2,16,000 in FY 2014-15 (Rs.18,000 X 12), of which Rs.14,000 goes towards principal repayment
  • Total interest on home loan, therefore, is Rs.2,02,000. Since the property is rented out, he can claim the entire interest as deduction.
  • Prakash can claim a deduction for principal repayment of Rs.14,000 under Section 80C. He must remember not to sell this property in the next five years. The amount claimed under Section 80C will be added back to his income in the year of sale and he will be taxed accordingly if the property is sold within five years.

Now let’s look at interest paid when the house was under construction:

  • The period from borrowing money until the 31 March immediately preceding the year of completion of construction of the house is called pre-construction period.
  • Pre-construction interest deduction is allowed for interest payments made from the date of borrowing till March 31st before the financial year in which the construction is completed.
  • Here the pre-construction EMI payment will be calculated for 21 months between July 2012 to March 2014 as under:
FY 2014-15 – July 2014-March 2015 >> 18,000 X 9 = 1,62,000
FY 2015-16 – April 2015-March 2016 >> 18,000 X 12 = 2,16,000
This adds up to Rs.3,78,000.
  • The total EMI payment included principal repayment of Rs.24,000. Subtract this to arrive at pre-construction interest.
  • Rs.3,78,000 – Rs.24,000 = Rs.3,54,000 is the pre-construction interest that can be claimed in five equal installments of Rs.70,800 starting from FY 2016-17.

So Prakash can claim Rs.2,02,000 + Rs.70,800 = Rs.2,72,800 as deduction towards interest from home loan in FY 2016-17.

All said and done, one needs to bear in mind that from FY 2017-18, the loss from house property that can be set off against other heads of income has been restricted to Rs 2,00,000