Deduction of Pre-construction period Housing Loan Repayment and Interest
I have been asked a question about the claiming of deduction of Housing Loan Principal Repayment and Interest thereon till the time house is not completed or still in construction phase.
In this article we will discuss what would be the status of Housing Loan and Interest in case of house is still under construction.
Deduction of repayment of Housing Loan Principal is governed by section 80C while Deduction of Interest on Housing Loan is governed by section 24 of the Income Tax Act, 1961.
Let us start with understanding the language Section 24(b) regarding Housing loan interest deduction of pre-construction period:
Interest of House loan, if house is not completed by end of previous year [section 24 (b)]
Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal installments for the said previous year and for each of the four immediately succeeding previous years.
If you see the language, it talks about “Acquired or Constructed”, means deduction can be claimed only if the house is completed or acquired/purchased. The interest must be payable by the assessee in the previous year in which such property is acquired or constructed. The deduction could be claimed in five equal installments, commencing from the previous year in which the house is acquired or constructed.
So it is evident from the above that the interest related to pre-construction is not allowed before completion of house.
Now the question arises what is Pre-Construction Period?
Pre-construction period means the period commencing (started) from the date of borrowing and ending March 31, immediately prior to the date of completion of construction /date of acquisition or date of repayment of loan, whichever is earlier.
Above stated interpretation could be easy to understand with an example.
If Sanyam takes a housing loan of Rs 25,00,000 @ 4% p.a. for constructing a House on 1st April, 2009 and Construction of house gets completed on 28th February, 2013, then the pre-construction period is:
Pre-construction period starts from the date on which loan is taken to March 31st, immediately prior to the date of completion of construction.
So in above example house gets completed on 28th February, 2013, pre-construction period is
- 01-04-2009 to 31.03.2012
Now if the interest for above pre-construction period amounts to Rs 3,00,000 then deduction will be available in 5 equal installments of Rs.60,000 each starting from the Financial year 2012-13 to 2016-17.
Deduction of repayment of House loan Principal, if house is not completed by the end of previous year [Section 80C]:
(xviii) for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” (or which would, if it had not been used for the assessee’s own residence, have been chargeable to tax under that head), where such payments are made towards or by way of (installment of house loan)”
Again, if you look at the language, it says the deduction is available only if the house is chargeable to tax under the head “Income from house Property”.
Further a clarification has been issued by department vide circular no. 498 dated 04.11.1987 that deduction under section 80C for repayment of house loan paid in a previous year can only be claimed if house construction is completed before the end of previous year.
Complete circular is given below
Circular: No. 498 [F. No. 275/111/87-IT(B)], dated 4-11-1987
502. Repayment of loans, etc., taken for purchase/construction of house – Whether deduction admissible under sub-clause (ii) of clause (b) of sub-section (2) where construction of house is still continuing during previous year relevant to assessment year 1988-89
1. I am directed to refer to para 4(8)(e)(ii) of this Department’s Circular No. 489 [F. No. 275/51/87-IT(B)], dated 25-6-1987 [see under section 192] wherein the incentives provided under section 80C to the income-tax payers in respect of housing loans, etc., taken from specified institutions have been explained.
2. References have been received from some quarters inquiring whether the repayment of loans taken for the purchase or construction of a new residential house property, the construction of which is still continuing would qualify for deduction under section 80C.
3. According to the provisions of sub-clause (ii) of clause (h) of sub-section (2) of section 80C, in computing the total income of an assessee, a deduction shall be allowed for any sum paid towards the purchase or construction of a residential house property subject to the fulfillment of the conditions laid down therein. For the admissibility of this deduction, the construction of the house property should be completed after 31-3-1987 and the income from the same should be chargeable to tax under the head ‘Income from house property’ in the relevant assessment year. For the guidance of Drawing and Disbursing Officers and other persons responsible for the payment of income chargeable under the head ‘Salaries’, it is clarified that in a case where the construction of the property does not get completed by the end of the previous year relevant to the assessment year 1988-89, no deduction under this provision shall be admissible to the assessee in the assessment of his income for this assessment year. This aspect may please be kept in mind while deducting the tax at source under section 192 in the financial year 1987-88.
Pre EMI Interest:
Normally we find word ‘Pre EMI Interest’ in Bank Statement and Tax certificate provided by bank for home loan. Here Pre EMI interest is different from Pre construction interest. Pre EMI interest is levied by bank for the period between date of disbursement and start of first EMI.
In the above example bank has disbursed Rs.25, 00,000 on April 2009 and if EMI starts from July 2009, then the Interest from April 2009 to July 2009 will be treated as Pre-EMI Interest.
There is no nexus between Pre-construction Interest and Pre-EMI Interest.