Pre-Construction Interest on a Home Loan: The Five-Instalment Tax Rule

Buyers of under-construction homes pay loan interest for months or years before they receive the keys. Income tax law allows that interest as a deduction, but only after the home is complete and only in five yearly parts. This guide explains the rule for a buyer in Bangalore: which interest counts, when the claim starts, how the yearly limit applies and what records to keep.

What Counts as Pre-Construction Interest

A loan on an under-construction flat is released in stages, and interest runs on each amount from the day it is released. Pre-construction interest is the interest for the period from the first release up to 31 March before the financial year in which the home is completed. Interest from 1 April of the completion year is ordinary interest of that year.

The cut-off is the end of a financial year and has no link to the possession date itself. A buyer who gets possession in December 2026 counts interest up to 31 March 2026 as pre-construction interest. Interest from April 2026 to March 2027 is claimed as that year's interest.

The way the buyer pays makes no difference. Interest paid as pre-EMI and the interest part of a full EMI are treated alike. Principal repaid before completion is outside this rule and earns no deduction for those years.

Why the Claim Waits

Interest on a housing loan is deducted while computing income from house property. Until the home is complete, there is no house property to compute, so the deduction has nothing to apply to. The interest of those years is held over and comes into the return once the home exists.

The rule is in section 22 of the Income-tax Act, 2025, which applies from 1 April 2026. The earlier Act carried the same rule in section 24(b). A buyer should therefore budget the construction years with no tax relief on the interest paid.

The Five Instalments

The total pre-construction interest is divided into five equal parts. The first part is claimed for the year in which the home is completed, and one part for each of the next four years. The buyer adds the part to the interest of the year and claims the two together.

An example shows the working. The loan's first release is in July 2024 and possession comes in December 2026.

The pre-construction total is Rs. 4.5 Lakhs, so each instalment is Rs. 90,000. It is claimed for the five tax years from 2026-27 to 2030-31. The Rs. 4.1 Lakhs of the completion year is claimed in 2026-27 itself, subject to the limit below.

The Rs. 2 Lakh Limit for a Self-Occupied Home

Where the owner lives in the home, the interest deduction stops at Rs. 2 Lakhs a year. The instalment is counted inside this limit and is never added on top of it. The Finance Act, 2026 wrote this point expressly into the section.

In the example, the owner has Rs. 4.1 Lakhs of current interest and a Rs. 90,000 instalment in 2026-27. The total is Rs. 5 Lakhs, and the deduction is Rs. 2 Lakhs. The current interest alone crosses the limit, so the instalment brings no extra saving in that year.

This is the usual result on a large loan. The instalment adds to the deduction only when the interest of the year is below Rs. 2 Lakhs. That happens on a smaller loan or after heavy prepayment. An owner with Rs. 1.3 Lakhs of current interest would claim Rs. 2 Lakhs in all, using Rs. 70,000 of the Rs. 90,000 instalment.

The Five-Year Completion Condition

The Rs. 2 Lakh limit applies only where the home is bought or built within five years, counted from the end of the financial year in which the loan was taken. A loan taken in 2024-25 needs completion by 31 March 2030. When that date is missed, the limit for a self-occupied home falls to Rs. 30,000 a year.

A project delay therefore costs the buyer tax relief as well as time. The date of completion promised in the agreement, and the date registered with RERA, should leave a margin within the five years. Buyers comparing under-construction projects in areas such as Whitefield or Thanisandra should note both dates.

When the Home Is Rented Out

A let-out home has no fixed limit on interest. The owner starts with the rent, deducts municipal tax paid, takes a standard deduction of 30% of the balance, and then deducts the full interest. The full interest here includes the instalment of pre-construction interest.

Suppose the home in the example is let for Rs. 3 Lakhs a year, with municipal tax of Rs. 10,000. The balance of Rs. 2.9 Lakhs less 30% leaves Rs. 2.03 Lakhs. Interest of Rs. 5 Lakhs then produces a loss of Rs. 2.97 Lakhs.

In the old regime, Rs. 2 Lakhs of that loss is set against salary and other income of the year. The remaining Rs. 97,000 is carried forward for up to eight years against house property income. The instalment is used in full, though part of the benefit arrives later.

The Tax Regime Decides

The new tax regime is the default and gives no interest deduction on a self-occupied home. A buyer in that regime gets nothing from the five instalments on a home the family lives in. The instalments of a year spent in the new regime are not carried to a later year.

For a let-out home, the new regime allows interest against the rent of that home. A loss from the home cannot be set against other income or carried forward in that regime. The choice of regime is made each year, so the comparison should include the instalment in each of the five years.

Records to Keep

The claim comes years after the interest is paid, so the papers should be collected as the loan runs. The following records support it:

• The lender's interest certificate for every financial year from the first release
• The loan statement showing each release and its date
• The possession letter or occupancy certificate, which fixes the year of completion
• A one-page working of the pre-construction total and the five instalments
• The sanction letter, which shows the financial year in which the loan was taken

A salaried buyer in the old regime declares the instalment to the employer each year with the current interest. Most lenders' certificates show only the interest of the year, so the working of the earlier years has to come from the buyer. The EMI calculator helps to plan the payments, and tax relief is best treated as an addition to that plan.