When Can You Claim Tax Benefits on a Home Construction Loan?

Building your dream home is an exciting milestone. While the construction process involves careful planning, budgeting, and patience, there’s also a financial advantage that many homeowners overlook: tax benefits on a home construction loan. With the right understanding and timely planning, you can reduce your tax burden and make your investment far more cost-effective.

If you’ve taken a loan to construct a residential property, the Income Tax Act allows you to claim deductions on both the principal repayment and the interest paid under specific conditions. Unlike ready-to-move-in homes, tax benefits for construction loans are not available immediately. They depend on the completion of construction, possession of the house, and how the loan is utilised.

Knowing when you become eligible, which sections of the Income Tax Act apply, and how to maximise these deductions can help you plan your finances better and save a substantial amount every year. Whether you’re in the middle of construction or nearing completion, understanding these rules ensures you don’t miss out on valuable tax savings while turning your dream home into reality.

Tax Benefits Depend on Completion of Construction

Under current tax laws, you cannot claim tax benefits on the interest portion of a home construction loan in India while your house is still under construction. The key point here is that the interest component’s tax benefits on a home construction loan in India start only after the construction of the property is completed or when you receive possession. During the construction period, any interest you pay is called pre-construction interest. You cannot claim this interest immediately during construction.

How to Claim Pre-Construction Interest

Once your house is completed and you have obtained the completion certificate/possession, you become eligible to claim home construction loan tax benefits in India on the interest you paid before possession. However, this isn’t all at once. According to the tax rules, the pre-construction interest is spread over five equal annual instalments starting from the year in which the construction is finished.

For example, if you apply for a home construction loan in April 2022 and the completion date is March 2025, the interest paid between this period is the pre-construction interest. From FY 2025 to 2026, you can claim tax benefits on the interest, including 1/5th of the pre-construction interest each year for five years. This encourages homebuyers to wait until the project is finished before claiming deductions on interest.

Interest deduction limits

After construction is complete, you can claim tax benefits of home construction loan for the interest component under Section 24(b) of the Income Tax Act. For self-occupied property, the limit of interest deduction is up to Rs. 2,00,000 per year. For a let-out or rented property, you can claim the entire interest.

This tax deduction on home construction loan interest includes the interest paid during and after the year of possession and a portion of the pre-construction interest (spread across five years). If construction isn’t completed within 5 years from the end of the financial year in which the loan was taken, the maximum allowed deduction is reduced to Rs. 30,000 under Section 24(b).

Principal Repayment Deduction

You can also claim tax benefits of home construction loan on the principal component under Section 80C. The maximum deduction is up to Rs. 1.5 lakh per year, including principal repayment, stamp duty, and registration charges. This deduction can only be claimed once construction is complete or upon possession, not while the property is still being built. If you sell the property within 5 years of possession, the deductions claimed earlier may be added back to your taxable income.

Additional Deductions for First-Time Buyers

Depending on when your loan was sanctioned and other criteria, you might qualify for additional tax exemption on home construction loans. As a first-time homebuyer, if the interest paid is above the regular limits, and you meet specified conditions (loan sanction dates and property value limits), you can get an exemption under Section 80 EE and 80 EEA. These can offer significant extra savings and are worth exploring with your tax advisor.

Some important considerations while claiming home construction loan tax benefits in India include:

Let-Out Property:

If the property is rented out, there's generally no upper limit on tax rebate on home construction loan interest deduction, and the 5-year construction rule doesn't apply.

Eligibility:

Ensure the Loan is used solely for building the residential property, as required by the Income Tax Act.

The documents required to claim tax deductions on Home Construction Loan interest are a possession letter and a construction completion certificate. Here are the details:

Possession Letter:

A possession letter is a formal document from a builder or developer to a buyer, acknowledging the physical handover of a completed property, marking the transfer of occupancy rights and the start of financial obligations like loan EMIs. However, it is not proof of legal ownership. It confirms the property is ready, includes details like possession date and property description, and is vital for loan disbursement and starting tax claims.

Construction Completion Certificate:

A Construction Completion Certificate (CC) is a vital legal document from local authorities certifying that a building is finished according to approved plans, meets all safety codes, and is compliant with regulations, such as structural integrity, fire safety, and adherence to building norms, protecting buyers from legal issues and penalties.

Note that Interest paid during the pre-construction period can be claimed in five equal installments, starting from the year the house is completed, and possession is taken.

Planning your home construction loan smartly can lead to significant tax savings, but timing matters. Depending on the construction stage, you can draw a request for funds from your lender. Prepare a comprehensive construction plan, approved by local authorities and keep required documents and government approvals ready for staged disbursements based on construction progress. It eases the process of getting a tax exemption on home construction loan.

With Niwas HFC by your side, you’ll not only get competitive interest rates but also personalised guidance on when and how you can maximise your tax rebate on home construction loan interest. Always consult with a certified tax advisor to resolve your queries. Talk to our experts today and make your dream home tax-efficient too!