Deduction against pre-construction interest incurred on house property construction

Meaning of pre-construction interest

Most people prefer to take a home loan while constructing their dream home. But the tax department doesn’t allow its deduction while the house is under construction. Pre-construction interest refers to that interest component of a loan which is paid before the place is ready-to-use.

What is the span of deduction?

For taxation purposes, the total pre-construction interest is divided into five equal parts. It is then allowed as deduction starting from the year in which the construction is complete. Taxpayer cannot choose the years in which he will avail the benefit since it is available for five consecutive years.

What is the maximum limit of deduction?

As per Section 24 of the Income Tax Act, 1961, the maximum deduction for the interest on housing loan is Rs 2 lakh for a financial year, in case the property is self-occupied. It includes both current and pre-construction interests.  If the property is under joint ownership, each owner gets the same limit and can claim it in their Income Tax Returns.

Example

Mr X took a home loan of Rs 10 lakh to initiate the construction of a house in Kolkata in January 2023. The interest amounted to Rs 10,000 per month, and the construction began in February 2023. He received the completion certificate of the same in May 2025.

It has been given out on rent beginning August 2025. What would be the tax treatment of the interest on the loan for the FY26?

Solution

Mr X can consider pre-construction interest from the period when the construction started. In the given case, the same began in February 2023, even though he got the loan in January 2023.

Further, he will only get the same till 31st March of 2025, i.e. 26 months. Since interest was Rs 10,000 per month, the total pre-construction interest was 26 * Rs 10,000, i.e. Rs 2.60 lakhs. Therefore, the maximum deduction is Rs 52,000 for five consecutive years.

Since the property is let out, he is eligible to claim deduction of the actual amount of interest paid on home loan without any maximum limit. He has paid 10,000 * 12, i.e. Rs 1.20 lakh as interest in FY26 and the pre-construction interest is Rs 52,000. The total deduction available is Rs 1.72 lakh for the FY26.