Employees are eligible for tax deductions on certain investments and savings. However, there’s one specific type of investment where the tax deduction isn’t available immediately—that is, the interest paid on a housing loan for an under-construction property. In this case, taxpayers can only begin to claim deductions after a 5-year period, once the construction is complete.

This article explains how you can claim the benefit of the interest paid during the construction period, known as pre-construction interest, while filing your Income Tax Return (ITR) for the Assessment Year (AY) 2025–26.

ITR Filing Deadline Extended

The Income Tax Department has extended the ITR filing deadline for FY 2024–25 (AY 2025–26) by 45 days. Now, individuals whose accounts are not required to be audited can file their returns by September 15, 2025. This gives salaried taxpayers additional time to gather their documents and file their returns correctly.

Under the old tax regime, salaried individuals typically declared their investments at the start of the financial year and submitted proofs towards the end. These declarations help employers determine how much tax to deduct from salaries (TDS). However, certain investments, such as housing loans for under-construction homes, have different tax rules.

What is Pre-Construction Interest?

If you've taken a home loan to build a house or to buy an under-construction flat, you’re eligible for a tax exemption that many people overlook. The interest you pay on the home loan until the construction is complete is called pre-construction interest. 

As per Section 24(b) of the Income Tax Act, 1961, interest on borrowed capital can be claimed as a deduction if the loan is used for acquiring, constructing, repairing, or renovating a property. However, this is generally applicable only when the property is ready to move in.

When a house is still under construction, the interest paid on the loan during that period is known as pre-construction or pre-acquisition interest. This interest qualifies for a tax deduction, but only under certain conditions and only after the construction of the property is finished.

When Does the Pre-Construction Period Begin and End?

The pre-construction period begins from the date the home loan is sanctioned and continues until either the end of the financial year just before the year in which the construction is completed or the date the loan is fully repaid, whichever comes first. For instance, if your house is completed in the financial year 2024–25, the pre-construction period would end on March 31, 2024.

How to Claim Pre-Construction Interest in ITR

You cannot claim the full interest amount in 1 year. Instead, it has to be divided equally over 5 years. For instance, if your total pre-construction interest is ₹1,00,000, you can claim ₹20,000 every year for 5 years starting from the year the construction is completed.

This amount is subject to a maximum deduction of ₹2,00,000 per year under Section 24(b) for self-occupied properties. If the house is let out, there is no upper limit on the interest deduction.

Read More, ITR Filing 2025: A Guide for First-Time Taxpayers. 

Steps to Claim Pre-Construction Interest While Filing ITR

Here are the steps you should follow to claim tax benefits on pre-construction interest:

• Identify Pre-Construction Interest

  Pre-construction interest is the interest portion of your EMI (Equated Monthly Instalments) paid on borrowed capital before construction is complete. You need to calculate the total interest component from the start of the loan till the end of the pre-construction period.

• Adjust for Claimed Interest

  If any portion of the interest has already been claimed as a deduction (either in the past or current year), subtract that amount from your total.

• Divide the Balance by 5

  The remaining interest can be divided equally into 5 parts, and one part can be claimed each year—starting from the year in which the construction is finished and continuing for the next four years.

• Limit for Self-Occupied Homes

  For self-occupied homes, remember that the maximum interest deduction is ₹2,00,000 per year, and the pre-construction interest is included within this limit.

• No Cap for Rented-Out Homes

  If the property is rented or considered as deemed let-out, there is no limit on the interest amount that can be claimed as a deduction.

• Report in Schedule HP of ITR

  When filing your Income Tax Return, this interest must be disclosed under the 'House Property' section (Schedule HP), particularly under the category ‘Interest on Borrowed Capital’.

Conclusion

Pre-construction interest is a valuable but often overlooked tax benefit for those who take home loans for under-construction properties. While the deduction cannot be claimed immediately, taxpayers can still recover the benefits by carefully calculating and reporting them over 5 years.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.