Pre-Construction Interest Split
Claim pre-construction interest over 5 years
What is This Hack?
Claim pre-construction home loan interest over 5 years at ₹30,000 annually for self-occupied or fully for let-out property from possession year
How It Works
When you take a home loan for an under-construction property, you start paying EMIs immediately but can't claim interest deduction until you get possession. Section 24(b) allows you to claim ALL accumulated pre-construction interest, but NOT in one year - it must be spread equally over 5 years starting from the year of possession. Example: You paid ₹8 lakh interest during 3-year construction period. From possession year, you can claim ₹1.6 lakh per year for 5 years (₹8L ÷ 5). For SELF-OCCUPIED property, total Section 24(b) deduction is capped at ₹2 lakh (including current year interest + 1/5th pre-construction interest). For LET-OUT/DEEMED LET-OUT property, there's NO LIMIT - claim full amount. This is a tax arbitrage: if you have high pre-construction interest, consider renting out the property (even at nominal rent) to claim full deduction instead of ₹2L cap. Most people don't track pre-construction interest separately and miss claiming it.
Real Example: Under-Construction Flat in Pune with 3-Year Construction Delay
Situation
Amit bought a 2BHK flat in Pune for ₹80 lakh in Jan 2021. Home loan: ₹60 lakh at 8.5% interest. Builder promised possession in Dec 2022 but delayed to March 2024 (3 years construction). Amit paid EMIs throughout construction period. He plans to self-occupy (not rent out).
Without This Hack
Amit doesn't know about pre-construction interest claim. He only claims current year interest from FY 2024-25 onwards: FY 2024-25: Interest ₹4.8L (but self-occupied cap ₹2L, so claims only ₹2L). He never claims the ₹15 lakh interest paid during 3-year construction period. Lost tax benefit: ₹15L deduction = ₹4.5L tax saved (at 30% slab). This money is GONE forever.
With This Hack
Amit tracks pre-construction interest meticulously: Jan 2021 to Feb 2024 (38 months): Total interest paid ≈ ₹15 lakh. From FY 2024-25 (possession year), he claims: 1/5th pre-construction = ₹15L ÷ 5 = ₹3L per year, Current year interest: ₹4.8L. Total deduction needed: ₹3L + ₹4.8L = ₹7.8L. But self-occupied cap is ₹2L! Problem: He's losing ₹5.8L deduction due to cap. Solution: He rents out the flat at ₹20K/month (nominal rent to friend/relative). Property becomes "let-out". Let-out property has NO ₹2L cap. FY 2024-25 to 2028-29 (5 years): Annual deduction: ₹3L (1/5 pre-construction) + ₹4.8L (reducing each year as principal paid) ≈ ₹7.8L Year 1. Tax saved per year: ₹7.8L × 30% = ₹2.34L (Year 1). Over 5 years: approx ₹8-10L total tax saved. By renting nominally, he unlocks full deduction.
💰 ₹8-10 lakh total tax saved over 5 years by claiming pre-construction interest
Common Pitfalls to Avoid
- Must track pre-construction interest from day 1 - banks don't always provide clear breakup
- If you forget to claim in possession year, you lose 1/5th permanently for that year
- Self-occupied property has ₹2L overall cap - consider renting if pre-construction interest is high
- If possession year falls in Mar (end of FY), claim starts same FY - don't miss it
- Joint loan with multiple owners: Each owner claims proportionate deduction based on ownership %
- If you sell property in year 3, remaining 2 years deduction may be disputed - consult CA
- Some CAs advise claiming current year interest first (up to ₹2L) and then pre-construction - check with expert
Prerequisites & Requirements
- Home loan for under-construction property (not ready possession)
- Pre-construction interest records from bank (interest certificates)
- Possession certificate or completion certificate with date
- Property must be construction-complete (you get possession)
- Maintain annual interest certificates for all 5 years
- ITR filing with Schedule HP for house property income
- For let-out strategy: Rent agreement and rental income declaration
Key Benefits
- Potential savings: ₹30,000-2 lakhs over 5 years
- Implementation time: 1 day
- Legal status: fully legal
- Risk level: low
Related Topics
Related Articles
Related Hacks
Step-by-Step Guide
Maintain Pre-Construction Interest Records
From first EMI until possession certificate date, track all interest paid separately. Request "Interest Certificate" from bank every financial year showing: Principal paid, Interest paid, Outstanding balance. Keep possession certificate/completion certificate with exact date.
Calculate Total Pre-Construction Interest
Add up all interest paid from loan disbursement date to day BEFORE possession date. Example: Loan: Jan 2022, Possession: April 2024. Pre-construction period: Jan 2022 to March 2024 (27 months). Suppose total interest paid: ₹6 lakh. This becomes your base for 5-year split.
Determine Year of Possession
Possession year is when you get legal possession (completion certificate/occupation certificate), NOT when you start living. If possession in April 2024, claim starts from FY 2024-25. Even if construction delays by years, deduction starts only from possession year.
Divide by 5 Equal Installments
Total pre-construction interest ÷ 5 = Annual claimable amount. Example: ₹6L ÷ 5 = ₹1.2L per year for 5 years (FY 2024-25 to 2028-29). This is MANDATORY - you can't claim more in early years, even if you want.
Add Current Year Interest
Each year, you claim: (1/5 pre-construction interest) + (current year interest on outstanding loan). Example Year 1: ₹1.2L (1/5 pre-construction) + ₹80K (current year interest) = ₹2L total. Check Section 24(b) limit: Self-occupied: Max ₹2L total, Let-out: No limit.
Declare in ITR Schedule HP
While filing ITR, go to Schedule HP (Income from House Property). Enter: Property address, Ownership %, Annual rental value (₹0 if self-occupied), Interest on loan: Show pre-construction interest (1/5th) + current year interest separately. ITR form has specific fields for pre-construction interest.
Claim for All 5 Years
Continue claiming 1/5th installment every year for 5 years even if you prepay loan or sell property mid-way. IT department allows full 5-year claim as long as you owned property during each year. If you sell property in year 3, you can still claim remaining 2 years if new buyer doesn't object.