A home loan borrower can claim income tax deduction on interest payments made against home loan for a maximum of Rs. 2 lakhs and further up to Rs. 1.5 lakhs for principal repayment for self occupied property as per the provisions of section 80 C. Even if the home loan borrower has started paying EMIs (equated monthly installments), these tax benefits are not allowed during the pre-construction phase. As per the provisions of section 24 of the Income Tax Act, if a property is still to be constructed then the tax deductions on the interest payments on the loan during the non-construction phase will not be allowed to the loan borrower. However, the interest payments made on the home loan during the construction phase of the property for which the loan has been taken is allowed to be claimed as tax deduction in 5 five equal installments beginning the year in which the construction is completed. While setting to claim the tax deduction on home loan interest payments, many people often remain confused because of the terms used in this context. Through the way of this post, you will be able to understand the various terminologies related to tax deduction on home loan interest payments related to the under construction house.
Meaning of Prior Period
Prior period is the period beginning from the date of borrowing the home loan to the end of the financial year that immediately precedes the financial year in which the acquisition of the relevant property was made or the construction of the property was completed. The period beginning the borrowing of the loan to date of construction of the house is known as pre-construction or under construction period.
Meaning of Prior Period Interest
The interest payments made towards the home loan during the prior period or pre-construction period is known as prior period interest. For example – If you have taken a loan on 25-10-13 and the construction was completed on 27-8-15, then the period commencing 25-10-13 to 31-3-15 will be known as the prior period and the interest paid on the home loan during this duration will be known as prior period interest.
Calculating prior period or pre-construction interest
In order to calculate the prior period interest or the pre-constriction interest, one has to follow the following steps:
1) Take a note of the date of borrowing of the home loan
2) Take a note of the date of acquisition of the property or the date of completion of the construction of the property
3) Ascertain the last date of the financial year immediately preceding the acquisition of the property or the completion of the construction of the property
4) Calculate the prior period or under construction period, i.e. the difference between point 3 and point 2
5) Calculate the prior period interest or pre-construction period interest paid during the prior period
6) Calculate the tax deduction that is allowed for interest payments on home loan made during the prior period by dividing the prior period interest by 5
In case of self occupied property, the prior period interest installment and the normal interest are allowed to the maximum of Rs. 2 lakhs. There are no restrictions on letting out of this property. However, one must remember that the interest payments on home loan are not permissible as tax deduction if the loan has been taken for renovation, repair or renewal or for extension of the house.
Difference between Pre-EMI interest and Pre-construction interest
The amount of interest due from the beginning of the borrowing date of home loan to the payment of first installment is known as pre-EMI interest. Whereas, the amount of interest paid since the beginning of the loan to the last date of the financial year immediately preceding the completion of the construction of the house is known as pre-construction interest.
For example – A loan has been borrowed on 1-1-13 but the borrower has started paying the EMIs from 1-1-14 and the construction of the property was complete on 29-7-15. In this case, the interest paid during 1-1-13 to 31-12-13 is pre-EMI interest and the interest payments made during 1-1-13 to 31-3-15 is pre-construction interest. Therefore, there can be an overlapping in the duration of these two terms.
With delay in the possession of the property (which many of us are facing because of the delay in builder projects) then there will be a delay in the tax benefits to that extent.
