If you’ve taken a home loan for an under-construction property, Budget 2026 has finally cleared the confusion around how pre-construction interest is treated for tax purposes. While this clarification brings much-needed certainty, it also confirms that tax benefits remain capped, making careful planning essential for homebuyers.
What Is Pre-Construction Interest?
Pre-construction (or prior-period) interest refers to the interest paid on a home loan after the loan is sanctioned but before construction is completed and possession is taken.
Since the property is not yet ready for use, this interest cannot be claimed as a tax deduction during the construction period.
What Budget 2026 Clearly Confirms
Budget 2026 makes the following points unambiguous:
- Pre-construction interest can be claimed only after possession
- The total pre-construction interest must be spread equally over five years
- This deduction is included within the ₹2 lakh annual limit for self-occupied properties
In simple terms: pre-construction interest is not an additional benefit over the ₹2 lakh cap—it forms part of it.
How This Works in Practice
If a homebuyer pays ₹1.5 lakh as interest during construction, the amount can be claimed as:
- ₹30,000 per year for five years, starting from the year of possession
However, the combined deduction of:
- regular home loan interest plus
- pre-construction interest instalment
cannot exceed ₹2 lakh in any single year.
This alignment with existing tax provisions removes earlier confusion caused by inconsistent wording under the new Income Tax Act.
Relief—But Only to an Extent
Allowing pre-construction interest to be spread over five years offers partial relief, especially for buyers facing long possession delays. However, the unchanged ₹2 lakh cap limits the actual tax benefit, particularly in the early years when interest outgo is highest.
Old vs New Tax Regime: Calculate Before You Choose
For Self-Occupied Homes
Old Tax Regime
- Interest deduction up to ₹2 lakh
- Principal repayment eligible under Section 80C (within ₹1.5 lakh overall limit)
New Tax Regime
- No interest or principal deductions for self-occupied properties
For borrowers with high interest payments, especially in the early loan years, the old regime may still be beneficial. However, it does not automatically guarantee lower tax—individual calculations are critical.
Rental Properties: New Tax Regime Has a Clear Advantage
For let-out properties, the new tax regime is more attractive:
- No upper limit on home loan interest deduction
- 30% standard deduction on rental income for repairs and maintenance
These provisions significantly improve post-tax cash flows, making the new regime better suited for property investors and owners of multiple homes.
What Homebuyers Should Do Next
Budget 2026 has brought clarity—but not higher deductions. The key takeaways for homebuyers and investors are:
- Understand how pre-construction interest is claimed
- Compare old vs new tax regimes carefully
- Align your home loan and tax strategy with your income, goals, and holding period
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