As per section 24 of Income tax Act, 1961, Interest on borrowed capital is allowable as a deduction if capital is borrowed for the purpose of purchase, construction,repair, renewal or reconstruction of the house property.Please note in case of complete house property ,one can claim interest deduction in the same year but for pre construction period interest on housing loan treatment would be different.
It is to be noted that if money is borrowed prior to acquisition or construction of house property, Aggregated Interest on borrowed capital is also allowable as deduction in five equal annual installments starting from the year in which acquisition or construction is completed as a pre-construction period Interest.Pre-construction Interest deduction is not allowable for renewal, repair or reconstruction of house property.
Person took home loan on April, 2009 for Rs.10, 00,000 for construction of house property carried Interest @ 10% p.a.. Construction completed on April 2011 and person has paid Rs.2, 00,000 as interest during financial year 2009-2010 and 2010-2011.
Loan taken on : April 2009
Construction completed on : April 2011
Pre- construction period : From April 2009 to April 2011
Pre- construction period interest : Rs.2, 00,000
Interest Deduction : Rs.40, 000 from financial year 2011-12 (AY 2012-13) onwards in 5 equal Annual installments
Please note that only Pre construction period interest is allowed as deduction and not principal repayment.
Pre EMI Interest:
Normally we find word ‘Pre EMI Interest’ in Bank Statement and Tax certificate provided by bank for home loan.Here Pre EMI interest is different from Pre construction interest. Pre EMI interest is levied by bank for the period between date of disbursement and start of first EMI.
In the above example bank has disbursed Rs.10, 00,000 on April 2009 but EMI starts from July 2009. Hence Interest from April 2009 to July 2009 will be treated as Pre EMI Interest.
There is no connection between Pre construction Interest and Pre EMI Interest.