Income Tax Rules: If you have built a new house by taking a home loan or have invested in an under construction flat, then you can avail a tax exemption, let’s know about it…
Income Tax Rules: If you have built a new house by taking a home loan or have invested in an under-construction flat, then you can avail a tax exemption. The interest you pay on the loan until the house is ready is called ‘pre-construction interest’. You can also claim income tax exemption on this interest. The only condition for this is that you claim it on time and correctly while filing ITR.
What is ‘pre-construction interest’ and how will you get exemption?
According to a report in Financial Express, CA (Dr) Suresh Surana said that Section 24(B) of the Income Tax Act, 1961 (hereinafter referred to as the IT Act) allows deduction of interest where the property is acquired, constructed, repaired, renovated or reconstructed from the loan capital. In a case where interest on home loan is paid in respect of an under-construction property, it is called pre-construction period interest.
He said that the pre-construction period starts from the date of taking the loan and ends on the last day of the previous financial year in which the construction is completed, i.e. March 31 of the year in which the construction is completed or the date of repayment of the loan (whichever is earlier).
How to claim pre-construction home loan interest while filing ITR?
You can claim this interest not all at once but in equal parts every year for 5 years after the construction is completed. This can be explained with an example. For example, if you have paid interest of Rs 1 lakh before the house is built, then you can show a deduction of Rs 20,000 every year in your ITR for the next 5 years. This will be included in the annual limit of Rs 2 lakh.
Kinjal Bhuta, Secretary, Bombay Chartered Accountants Society, explains the steps to claim benefits on interest amount paid during 5 years.
Pre-construction interest is the interest on the loan amount taken for the construction of a property. Taxpayers need to first find out the interest component by dividing the EMI payment on the loan amount till the year of construction. From the interest component, any amount of interest, if it has been claimed as a deduction from income tax in the previous or current year , must be deducted.
The balance amount of interest can be divided by 5 and claimed in the year of completion of construction and the subsequent 4 years. The maximum deduction on house loan interest for self-occupied house property is limited to Rs 2,00,000 and pre-construction interest is also part of this overall limit.
There is no such limit in case of rented property. In ITR, this interest can be claimed under the head ‘Interest on borrowed capital’ in Schedule HP.
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