Why Pre-Construction Interest Matters For Tax Savings

If you are a part of the old tax regime, then you can claim up to Rs 1.5 lakh under section 80C under your home loan principal and up to Rs 2 lakh on interest paid under section 24 (b) for a self-occupied property. But that is not all.

Don’t Ignore Pre-Construction Interest 

Such pre-construction interest can be claimed as a deduction in five equal annual instalments, starting from the tax year in which the property is acquired or constructed.

Many homebuyers, upon taking home loans, focus solely on their equated monthly instalments (EMIs) and overlook the interest component, especially the portion paid during the construction phase. Under Section 22 of the Income‑tax Act, 2025 (which corresponds to Section 24 of the 1961 Act), the interest paid from the date of borrowing until 31 March before the tax year in which the construction is completed is characterised as pre-construction interest.

“Such pre-construction interest can be claimed as a deduction in five equal annual instalments, starting from the tax year in which the property is acquired or constructed. If homebuyers do not maintain a clear record of this pre‑construction interest, they may risk foregoing a legitimate deduction that could otherwise reduce their tax outflow over several years,” says Rahul Charkha, partner, Economic Laws Practice.

Documentation Matters Most 

However, the five-year rule is yet another area of confusion. “The overall pre-construction interest can only be claimed in five annual installments after possession, but this does not give any added benefit because each yearly deduction still falls under the Rs 2 lakh capping on interest,” says CA Priyal Goel Jain, partner and NRI tax expert, Dinesh Aarjav and Associates Chartered Accountants.

“The ability to claim pre‑construction interest is determined by the strength of one’s paperwork. Section 22 allows a deduction for pre‑construction interest, but the higher Rs 2 lakh cap for self‑occupied property is available only if the property is completed within five years from the end of the tax year in which the loan was taken, and the assessee furnishes a certificate from the lender specifying the interest payable,” says Charkha.

Further, the assessing officer may also call for evidence of completion/possession to verify the cut‑off between pre‑construction and post‑construction interest.

If the interest certificate, loan documents, and completion/possession records are incomplete or inconsistent, the deduction may be disallowed or restricted to the lower Rs 30,000 limit. Therefore, robust documentation is essential to ensure that this benefit is not lost on technical grounds.

“The rules and regulations are not the problem here. The real issue is the lack of tracking and incomplete documents. With little more discipline, the tracking system can drastically increase the likelihood of receiving the full tax benefit,” says Jain.