• Notification Date: 25-05-2024
• Notification No: N/A

Income Tax Filing: You can Claim Tax Deduction for Under-construction Property

It is important to understand that you are eligible for deduction on interest paid on your home loan under section 24(b) of the Income Tax Act. However, there are specific regulations when and how this deduction can be availed.  

For instance, during the construction phase, the interest paid on a home loan is termed as 'pre-construction interest.' This deduction isn't immediately applicable as the interest accrues.   

Instead, it can be claimed in five equal instalments starting from the financial year in which the property's construction is completed, and possession is taken.  

According to Manikandan S, a tax expert from ClearTax, "Deduction on Interest on borrowed capital under section 24(b) is contingent upon the completion of construction. However, interest payable for the period preceding the year of property acquisition or construction can be claimed over a five-year period, starting from the year of acquisition or completion of construction. The construction must be completed within five years from the end of the financial year in which the home loan was obtained."  

Importantly this deduction becomes applicable only when the property's construction is completed, or possession is taken. It cannot be claimed during the construction phase.  

"To claim this deduction, ensure that the property's construction is completed within five years from the end of the financial year in which the loan was acquired. Failure to meet this condition reduces the deduction limit to Rs 30,000 instead of Rs 2 lakh," advises Kunal Varma, CEO and Co-founder at Freo.  

"However, the total deduction for interest, including both regular annual interest and pre-construction interest, is capped at Rs2 lakh per annum under Section 24(b) of the Income Tax Act. This cap applies to self-occupied properties. For let-out properties, there's no upper limit on the interest deduction," explains Varma.   

Under the new tax regime, no deduction is allowed under section 24(b) for self-occupied property.  Additionally, Manikandan notes, "A deduction is allowed under Section 24(b) without any limits for let-out property, regardless of the tax regimes."  

Finally, maintaining proof of interest payments during the construction phase is crucial for claiming this deduction. Seeking guidance from a tax advisor for accurate calculation and effective tax planning around these regulations is advisable.