Home Loan Tax Benefits in India: Pre-Construction Interest Deduction & More

Owning a home is a dream for many, and home loans make it easier by offering financial assistance. Additionally, the Indian Income Tax Act provides several tax benefits on home loans, making it more affordable for borrowers. If you’re constructing a house or buying an under-construction property, understanding tax deductions under Sections 24(b), 80C, and 80EEA can help you save a significant amount of tax. 

This blog explains tax benefits on home construction loans, pre-construction interest deduction, principal repayment, stamp duty, joint home loans, and second home loans in a structured manner.

1. Understanding Pre-Construction Interest Deduction Under Section 24 

What is the Pre-Construction Period in Income Tax?

The pre-construction period refers to the time between the loan sanction date and the date of completion of construction or purchase of the house. During this period, the interest paid on the home loan is called pre-construction interest, and it is not eligible for deduction immediately.

Deduction of Pre-Construction Interest Under Section 24(b)

• Pre-construction interest can be claimed as a deduction only after the construction is completed.
• The total pre-construction interest paid is allowed as a deduction in five equal installments starting from the year in which the property is completed.
• The maximum deduction limit for self-occupied properties under Section 24(b) is ₹2 lakh per year.
• For let-out properties, there is no upper limit on interest deduction, but total loss from house property can be adjusted up to ₹2 lakh per financial year under income tax laws.

Example:
If you take a home loan in April 2021 and your house is completed in April 2024, the pre-construction period will be from April 2021 to March 2024. If you paid ₹5 lakh as pre-construction interest, you can claim ₹1 lakh per year (₹5 lakh ÷ 5) from FY 2024-25 onwards.

2. Tax Benefits on Home Construction Loan

If you are constructing a house using a home loan, you can claim deductions under different sections:
Tax Deduction on Interest Paid on Home Loan (Section 24B)

• The interest paid on a home loan during and after construction is deductible under Section 24(b).
• Maximum deduction:
• ₹2 lakh per annum for self-occupied property.
• No limit for rented-out properties (subject to overall loss from house property limit of ₹2 lakh).

Tax Deductions on Principal Repayment (Section 80C)

• You can claim a deduction of up to ₹1.5 lakh per year on the principal repayment of a home loan under Section 80C.
• This benefit is available only after the construction is complete.
• If you sell the property within 5 years, the tax benefit is reversed, and the claimed deduction will be added back to your taxable income.

3. Tax Benefits on Home Loan for Under-Construction Property

Many homebuyers purchase under-construction properties. However, tax benefits under Sections 80C and 24(b) are available only after possession.

Can You Claim a Deduction Before Possession?

• No deductions are allowed on the principal repayment under Section 80C before the construction is completed.
• Interest paid during the pre-construction period can be claimed after possession, in five equal annual installments under Section 24(b).

4. Additional Tax Benefits on Home Loans

Tax Deduction on Joint Home Loan

• If a home loan is taken jointly (e.g., with a spouse or parent), each co-borrower can claim:
• ₹2 lakh deduction on interest under Section 24(b).
• ₹1.5 lakh deduction on principal repayment under Section 80C.·        
• Both co-borrowers must be co-owners of the property to claim the benefit.

Tax Benefits on Second Home Loan

• For self-occupied properties, only one property can be considered as self-occupied.
• The second home is considered deemed to be let out, and the notional rent is taxable.
• Interest paid on the second home loan is deductible under Section 24(b) with no upper limit (subject to the ₹2 lakh loss from house property cap).

5. Tax Exemption for Home Construction Loan

If you have taken a home construction loan, the tax exemptions are applicable as follows:

• Section 24(b): Deduction on interest up to ₹2 lakh per annum.
• Section 80C: Deduction on principal repayment up to ₹1.5 lakh per annum.
• Pre-construction interest: Deductible in five equal installments after construction is completed.

6. Impact of New Tax Regime on Home Loan Benefits

•  Under the new tax regime (introduced in FY 2020-21), all deductions, including 80C and 24(b), are not available.
• If you wish to claim home loan tax benefits, you must continue with the old tax regime.

7. How to Avail Tax Benefits on an Under-Construction Property?

To maximize tax savings on under-construction property:

• Maintain records of interest payments made during the pre-construction period.
• Claim pre-construction interest deduction in five equal parts after completion.
• Avoid selling the property within five years to retain Section 80C benefits.

FAQs on Home Loan Tax Benefits

1. What is a Home Construction Loan?

A home construction loan is a loan taken specifically to construct a house instead of buying a ready-made property.

2. Can I Claim Tax Benefits If My House is Under Construction?

No, tax benefits on home loans are available only after construction is complete, except for pre-construction interest deduction under Section 24(b).

3. Can I Get a Deduction for Stamp Duty and Registration Charges?

Yes, you can claim stamp duty and registration charges under Section 80C, but only in the year of payment.

4. What is the Maximum Deduction on Home Loan Interest?

₹2 lakh per year for self-occupied properties under Section 24(b).

No limit for rented-out properties (subject to the overall house property loss limit of ₹2 lakh).

5. Does the New Tax Regime Allow Home Loan Deductions?

No, home loan deductions are not available under the new tax regime.

Conclusion

Home loan tax benefits help borrowers reduce their tax burden significantly. Understanding pre-construction interest deductions, principal repayment, and stamp duty exemptions can help you maximize savings. If you have taken a loan for an under-construction property, plan your finances accordingly to claim all possible deductions under Sections 24(b) and 80C after completion.

If you’re planning to buy or construct a home, consider these tax benefits while making your decision! Contact Nammane Construction for your hassle free house construction