Important Keyword: Income from House Property, Income Heads, Income Tax, ITR-2.

What is Pre-construction Interest?

During the pre-construction period, which spans from the approval of the home loan until the completion of the construction of the house property, interest deduction is not permitted as the property is still under construction. However, the interest paid during this pre-construction period, known as Pre-construction Interest, is eligible for deduction. This deduction is allowed in five equal installments starting from the year in which the construction of the property is completed. This provision allows taxpayers to spread out the benefit of interest deduction over multiple years, easing the financial burden associated with constructing the property.

How to calculate Pre-construction Interest?

To calculate the pre-construction period of a constructed house property, we need to determine the period from the year the home loan was taken until the year in which construction is completed. However, for interest deduction purposes, the interest will be allowed from the date of the loan taken until the 31st of March before the financial year in which construction is completed.

Let’s illustrate with an example:

Suppose the home loan was taken in the financial year 2018-2019 (FY 2018-19), and the construction of the property was completed in the financial year 2021-2022 (FY 2021-22).

1. Pre-construction period:
   • From FY 2018-19 (year of loan taken) to FY 2020-21 (the year before completion).
   • This spans three financial years.
2. Interest paid during the pre-construction period:
   • Obtain the annual home loan certificate issued by the bank for each financial year.
   • Add up the interest paid for the pre-construction period from FY 2018-19 to FY 2020-21.
3. Divide the total pre-construction interest into 5 equal installments:
   • Once the total pre-construction interest is determined, divide it into five equal parts.
4. Claiming deduction:
   • Claim the deduction of pre-construction interest from the financial year of completion of construction (FY 2021-22).
   • This deduction can be claimed while filing the Income Tax Return (ITR) on the Income Tax e-Filing portal under the head “Income from House Property.”

Example

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

To calculate the tax deduction Kunal can claim for the home loan while filing his return for the Financial Year (FY) 2019-20, we need to consider the pre-construction interest and the interest paid during the FY 2019-20.

1. Pre-construction interest:
   • Calculate the total pre-construction interest paid by Kunal from the year the home loan was taken until the completion of construction. Let’s assume this total pre-construction interest is INR X.
2. Interest paid during FY 2019-20:
   • Obtain the annual home loan certificate issued by the bank for FY 2019-20.
   • Determine the total interest paid by Kunal during FY 2019-20. Let’s assume this total interest paid during FY 2019-20 is INR Y.
3. Total deductible interest for FY 2019-20:
   • Add the pre-construction interest (INR X) and the interest paid during FY 2019-20 (INR Y) to get the total deductible interest for FY 2019-20.
4. Claiming the deduction:
   • Kunal can claim this total deductible interest as a deduction while filing his return for FY 2019-20 under the head “Income from House Property.”

Calculation of EMI payments for FY 2019-20

In the financial year 2019-20, Kunal paid a total of Rs. 3,00,000 as EMIs, out of which Rs. 1,35,000 went towards principal repayment, making him eligible for a deduction under Section 80C of the Income Tax Act. This deduction reduces his taxable income by Rs. 1,35,000.

Considering the property is rented out, Kunal can claim the entire interest amount of Rs. 1,65,000 as a deduction under Section 24(b) while filing his Income Tax Return (ITR) for the financial year 2019-20. This deduction helps reduce his taxable rental income, thereby lowering his overall tax liability.

let’s calculate the amount paid for pre-construction interest:

The pre-construction interest is allowed to be claimed in five equal installments starting from the year in which the construction is completed. In this case, since the construction was completed in December 2019, we need to calculate the pre-construction interest for the period from November 2017 to March 2019, which spans 17 months.

By determining the total pre-construction interest paid during this period and dividing it into five equal installments, Kunal can accurately calculate the amount of pre-construction interest to be claimed as a deduction in each financial year following the completion of construction.

Out of the total EMI payments amounting to Rs. 4,25,000, Rs. 1,91,250 is allocated towards principal repayment. This leaves Rs. 2,33,750 (Rs. 4,25,000 – Rs. 1,91,250) as the pre-construction interest, which is eligible to be claimed in five equal installments of Rs. 46,750 each, starting from the financial year 2019-20.

Therefore, Kunal will be able to claim a deduction of Rs. 1,65,000 (the interest paid during the financial year 2019-20) plus Rs. 46,750 (the first installment of pre-construction interest) totaling Rs. 2,11,750 as deduction towards home loan interest for the financial year 2019-20.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/