Borrowers with home loans look to take full advantage of the tax benefits available on their housing loan interest rate. Now, there are two components while paying the monthly instalments of the home loan, which are the interest payments and the principal payments. For the interest payments, it is possible to claim tax deductions of up to Rs 2 lakh under Section 24 of the Income Tax Act. For principal payments, you can claim a tax deduction of up to Rs 1.50 lakh under Section 80C of the Income Tax Act.
Do keep in mind that the construction of the property has to be completed within 5 years from the end of the financial year in which you have taken the home loan. The tax benefit that is mentioned under Section 24 is slashed to Rs 30,000 from Rs 2 lakh if the construction of the property has not been completed within 5 years from the financial year in which the home loan was acquired.
Now, many people are confused about what happens to the home loan interest rate that is being paid during the pre-construction period. Is it tax-deductible? Read on to find out:
What is pre-construction interest?
The period from which the home loan has been approved until the day of the property construction getting completed is known as the pre-construction period. Now, the interest paid during this period is not permitted for tax deduction until the property has completed construction, which is known as pre-construction interest.
How to calculate pre-construction interest?
First, calculate the pre-construction period. Next, look at the annual home loan certificate that your lender issues every year, which includes details of the total monthly instalments that have been paid which mentions both the interest as well as principal amounts. The final step involves claiming tax deduction of the pre-construction interest while filing your ITR, where you can go to the “Income from House Property” on the Income Tax e-Filing portal.
The pre-construction interest is tax-deductible in 5 equal instalments
The pre-construction interest of a home loan is tax-deductible in 5 instalments of equal amounts, starting from the first financial year in which the property has finished construction. It is only possible to claim tax deductions if you own the property in each of the 5 financial years. So, if the property that you buy completes construction in 2022, which is the financial year 2021-22, the pre-construction interest that is paid till 31st March 2022 can be claimed in 5 equal instalments until the financial year 2026-27. This tax deduction can be claimed even if the housing loan has been foreclosed as soon as you get possession of the property.
Now that any doubts regarding the tax benefits of pre-construction interest have been cleared, go ahead and apply for home loan to buy that dream house. Just make sure to use a home loan EMI calculator to be aware of the loan’s monthly instalments beforehand.