A home loan borrower can claim Income Tax exemption on interest payments of up to Rs 2 lakh and another Rs 1.5 lakh under Section 80 C towards the principal repayment for a Self-occupied property.
However, you cannot seek these tax benefits in the pre-construction phase (i.e. no tax deductions available for an under construction house), even if you have started repaying the housing loan through EMIs.
Often it is seen that housing loan is taken but the possession of the property is received in the next or later financial years. It may be because the property is not completed or constructed.
The Section 24 of the Income Tax Act states that if a property is still to be constructed, there will not be any tax deduction on the interest payment for all of those years.
However, the interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete.
In this post, let us understand – What is Pre-construction period interest? How to calculate pre-construction period interest on home loan? How to claim tax benefits /deductions on interest payments of an under construction house / Property?
Under Construction House & Tax Provisions on Home Loan
Let us understand certain terminologies related to an Under Construction house and home loan tax benefits.
What is Prior Period? (Under construction period)
Prior Period means the period from the ‘date of borrowal of the home loan up to the end of the Financial Year’ immediately preceding the financial year in which acquisition was made or construction was completed.
The period from borrowing money until the construction of the house is called pre-construction period or under construction period.
For Example: If you have taken a home loan say on 01-06-2013, and the construction of the property is completed on 01-06-2014. The period commencing from 01-06-2013 to 31-03-2014 shall be treated as ‘Prior Period’.
What is Prior Period Interest (PPI)? (Pre-construction period interest)
Prior Period Interest means the interest from the ‘date of borrowal of the home loan up to the end of the Financial Year’ immediately preceding the financial year in which acquisition was made or construction was completed. The interest portion paid during the under construction period / Prior period is known as ‘Prior Period Interest’.
For Example: If you have taken a home loan say on 01-06-2013, and the construction of the property is completed on 01-06-2014. The home loan interest paid for the period commencing from 01-06-2013 to 31-03-2014 shall be treated as ‘Prior Period Interest’.
How to calculate Prior Period Interest or Pre-construction Interest?
Step 1: Identify the date of borrowal of Home Loan
Step 2 : Identify the Date of completion / Acquisition (possession)
Step 3 : Identify the last date of the Financial Year immediately preceding the date of Completion / Acquisition
Step 4 : Calculate Prior Period. Prior Period = Period from Step 1 to Step 3
Step 5 : Calculate Prior Period Interest i.e., the total interest paid during the prior period.
Step 6 : Calculate Allowable prior period interest (APPI). APPI = Prior period interest as per Step 5 divided by 5.
Let us now consider an example to compute PPI and how it can be claimed as a tax deduction under Section 24.
Prabhas took a loan of Rs.10 lakh to start construction of his house property in Bangalore in July 2012. He has been paying EMIs ever since. The construction was completed in January 2015 and he received a completion certificate. This house has been on rent from February 2015. He now wants to file his income tax returns for FY 2014-15 (AY 2015-16).
Assuming his year wise interest payments (excluding Principal component in EMI) are as below;
FY 2012-13 = Rs 60,000 (July 2012 to March 2013)
FY 2013-14 = Rs 80,000 (April 2013 to March 2014)
FY 2014-15 = Rs 70,000 (April 2014 to March 2015)
Step 1 : Date of home loan acquisition – July 2012.
Step 2 : Date of completion of construction is – Jan 2015.
Step 3 : Applicable last date of FY for Prior Period calculation – Mar 2014.
Step 4 : Prior Period is the duration between July 2012 to Mar 2014.
Step 5 : Prior Period Interest is the total interest payments made between July 2012 and 31-Mar-2014. So, the total interest paid during under construction period is Rs 1,40,000 (Rs 60k + Rs 80k). This amount can be claimed in 5 equal installments of Rs 28,000 each starting from Financial Year 2014-15 (AY 2015-16).
Also for the interest paid during Financial Year 2014-15 ie Rs 70,000 can also be claimed along with Rs 28,000 in Assessment Year 2015-16.
The total interest that can be claimed as tax deduction under Section 24 for AY 2015-16 is Rs 98,000 (Rs 70k + Rs 28k).
(The remaining 4 installments of Rs 28,000 can be claimed in FY 2015-16, FY 2016-17, FY 2017-18 & in FY 2018-19 as Prior period interest in addition to normal interest / post construction period interest for the respective financial years)
Kindly remember that the aggregate limits under Section 24 are still applicable. The prior period interest installment plus ‘normal interest’ is allowed to the extent of Rs 2 Lakh only in-case of a Self occupied property. There is no such restriction if the property is a ‘Let-out’ one.
Under Construction Property & Income Tax provisions: FAQs
- I have taken a loan for renewing my house, is PPI applicable? – Prior Period Interest concept is not applicable if the loan amount is utilized for repairs, renewal or re-construction.
- What happens if Loan acquisition date and construction completion date fall in same financial year, do I need to claim under construction period interest in 5 installments? – If both, date of loan taken and occupation date / completion date had taken place in the same Financial year, entire interest pertaining to pre-construction period can be claimed along with regular interest in the same assessment year. There is no need to claim the prior period interest in 5 installments.
- Can I claim Principal component that is repaid during the pre-construction period? – Principal component of your EMIs paid during prior period is not eligible for any tax deduction.
- What is the difference between Pre-EMI interest & Pre-construction interest? – The pre EMI interest term given in Loan Statement is not necessarily same meaning as pre construction period as per income tax act. Interest up to the end of Financial year ,immediate proceeding to the year in which house is completed is known as Pre construction period / Prior period interest. Whereas, Interest due up to the start of payment of First Installment is known as Pre-EMI interest.
For example : Suppose a home loan is taken on Jan ,2012 and House is completed on 31.01.2015, in that case pre -construction Interest is taken from Jan 2012 to March 2014. Suppose bank has granted and disbursed the Loan in Jan 2012 but EMI started from Jan 2013.Then Interest from Jan, 2012 to Jan 2013 is treated as Pre-EMI interest by the bank.
- Can I get tax benefits if I take a loan to buy a Vacant plot or land? – No. You get no tax breaks if you take a loan to buy a plot of land.
Latest news : Budget 2016-17 – Home Loan Tax Benefits & Self Occupied Property :
Existing rule : To claim tax benefits on home loan of a Self-occupied Property, the construction has to be completed within 3 years from the end of the Financial Year in which the capital (home loan) borrowed.
New Provision (effective AY 2017-18) :
In view of the fact that housing projects often take longer time for completion, it is proposed that clause (b) of section 24 be amended to provide that the Deduction under the said provision on account of Interest paid on Home Loan for acquisition or construction of a self-occupied house property shall be available if the acquisition or construction is completed within FIVE years from the end of the financial year in which capital was borrowed.
This amendment will take effect from 1st day of April, 2017 and will, accordingly apply in relation to assessment year 2017-2018 and subsequent years.
Generally, the prices of under construction properties are lower than the prevailing market rates in a locality. So, some home loan buyers do prefer to buy them. But do it with open eyes, because apart from the obvious risk of delay in construction, you may also get some other financial hiccups if there are long delays.
The delayed possession of the house could exert severe financial pressure on the home buyer if he / she have to pay the EMI as well as the rent at the same time. Moreover, if the project gets stuck or even defaults, the home buyer is still liable to pay the interest and the principal component of the disbursed amount to the bank.
If there is a delay in the possession of the property, the tax benefits also get delayed to that extent.
I hope you find this article informative. Kindly share your comments 🙂
Continue reading :
- How to calculate Holding Period & Capital Gains on sale of an Under-Construction property?
- Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
(Image courtesy of dan at FreeDigitalPhotos.net)