Home Loan Under Construction Tax Benefit: Pre-EMI Interest

If your flat is still under construction, you cannot claim any home loan deduction yet. Under the old tax regime, the interest you pay before completion (often called pre-EMI interest) is added up and deducted in five equal yearly instalments from the year you get possession, within the ₹2 lakh cap for a self-occupied house. Principal repaid before possession is never deductible. These rules are as of October 2026, FY 2026-27.

Where the rule sits in the new law

From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. Interest on a home loan, including pre-construction interest, moved from old Section 24(b) to Section 22. Principal and stamp duty moved from old Section 80C to Section 123 (read with Schedule XV). The mechanics did not change. Our pillar guide on home loan tax benefits covers the full set of limits.

What counts as the pre-construction period

The pre-construction period starts on the date you borrowed and ends on 31 March immediately before the tax year in which construction is completed. Interest paid in the year of completion itself is not pre-construction interest; it is that year's regular interest.

So if you took the loan in July 2023 and the builder hands over possession in September 2026:

• Pre-construction period: July 2023 to 31 March 2026 (FY 2023-24, 2024-25, 2025-26)
• First instalment year: FY 2026-27
• Interest paid from April 2026 onward: regular interest for FY 2026-27

Keep the possession letter or completion certificate. It fixes the year your instalments begin.

Worked example: Neha's under-construction flat

Neha took a home loan in July 2023 for a flat that was handed over in September 2026. She lives in it, so it is self-occupied. She is in the old regime, 30% slab.

Interest paid during construction (pre-EMI):

Yearly instalment: ₹5,50,000 ÷ 5 = ₹1,10,000 for each of FY 2026-27 to FY 2030-31.

FY 2026-27 claim:

• Instalment of pre-construction interest: ₹1,10,000
• Interest paid in FY 2026-27: ₹2,30,000
• Total eligible interest: ₹3,40,000
• Allowed for a self-occupied house: ₹2,00,000 (cap)
• Lost for the year: ₹1,40,000

Tax saved on the interest: ₹2,00,000 × 31.2% (30% plus 4% cess) = ₹62,400.

Neha's regular interest will fall only slowly as the loan amortises, so with ₹1,10,000 of instalment added each year, her total is likely to stay above ₹2 lakh for all five years and the cap will bind each time. A borrower with a smaller loan might see the instalment push the total right up to ₹2 lakh without wasting any of it.

If Neha let the flat out instead, the full ₹3,40,000 would be deductible against rent. If that created a loss, she could set off up to ₹2 lakh against salary under the old regime and carry forward the rest for eight years. Under the new regime the loss would simply lapse.

The two five-year rules

Two separate five-year conditions apply, and people often mix them up.

1. Completion within five years of borrowing. For the ₹2 lakh cap on a self-occupied house, the house must be acquired or constructed within five years from the end of the tax year in which you took the loan. Neha borrowed in FY 2023-24, so her deadline was 31 March 2029. Had possession slipped past that date, her interest deduction would have dropped to ₹30,000 a year. Delayed projects are the main risk here. If your builder is running late, see our comparison of under-construction vs ready-to-move homes before you commit.

2. No sale within five years of possession. If you transfer the house within five years from the end of the tax year in which you got possession, all principal deductions claimed under old Section 80C (now Section 123) are reversed and added to your income in the year of sale. The interest deduction is not reversed.

Principal and stamp duty during construction

• Principal: Any principal you repay before possession is lost for tax purposes. Many under-construction loans are on pre-EMI (interest only), so this is often small. If you chose full EMIs from the first disbursement, the principal part of those early EMIs gives no deduction. Our guide on pre-EMI vs full EMI explains the trade-off.
• Stamp duty and registration: These are deductible in the tax year you actually pay them, within the ₹1.5 lakh Section 123 limit. If you register the agreement during construction, the claim falls in that year, not the year of possession.

Old regime vs new regime for an under-construction home

In the default new regime (old Section 115BAC, now Section 202), none of this helps for a self-occupied house: there is no interest deduction, no instalment of pre-construction interest, and no Section 123 deduction. So the instalments matter only if the old regime still works out cheaper for you once the flat is ready.

Do the maths for the year of possession, not today. In the construction years you may have nothing to claim, so the new regime often wins. From the possession year, add the ₹2 lakh interest and the Section 123 claim and compare again using our income tax calculator. Salaried taxpayers can choose the regime afresh each year when filing.

How to claim

1. Ask your lender for a year-wise interest statement covering the whole construction period. It should separate interest from principal and show the dates of each disbursement.
2. Compute the total pre-construction interest and divide by five. Keep this working sheet for all five years; you will reuse it.
3. Tell your employer in your declaration (Form 124, which replaced Form 12BB) with the lender's certificate and possession letter, so TDS reflects the claim.
4. In your return, report the instalment together with the current year's interest under income from house property. Keep the possession letter, sale agreement and interest statements with your records.

Common mistakes

• Claiming pre-EMI interest in the years it was paid, before possession.
• Claiming the instalment on top of the ₹2 lakh cap for a self-occupied house.
• Forgetting to claim instalments two to five after switching employers or tax preparers.
• Counting interest paid in the possession year as pre-construction interest.
• Assuming principal repaid during construction will be allowed later.

Key takeaways

• No home loan deduction is available while the house is under construction.
• Pre-construction interest is claimed in five equal instalments from the year of completion, within the ₹2 lakh self-occupied cap under the old regime.
• Principal repaid before possession is never deductible; stamp duty counts in the year paid.
• Completion beyond five years from the end of the borrowing year cuts the interest cap to ₹30,000.
• Selling within five years of possession reverses principal deductions.
• In the new regime there is no benefit for a self-occupied house, so compare regimes from the possession year.