Tax benefit on under-construction home loan interest remains intact in new act

Putting speculations to rest, Budget 2026 has brought an important clarification regarding pre-construction period housing loan interest.

Aligning the new Income Tax Act, 2025 which will come into effect from April 1, with the existing Income Tax Act 1961, the budget has proposed that pre-construction period interest on housing loans will qualify for deduction from the house property income.




Prior-period interest or pre-construction interest refers to the interest incurred on a housing loan during the construction phase of the house. Currently, this interest expense can be claimed as deduction in five equal annual instalments, commencing from the year of completion or acquisition of the property, with maximum deduction capped at Rs 2 lakhs for self-occupied properties. There is no such cap on let-out house properties.

With many families, especially in Tier-1 cities opting to book their flats which are under construction, this clarification puts anxiety at rest. Ameet Patel, partner at Manohar Chowdhry and Associates, explains, “This proposal is a clarification. It does not enhance the quantum of deduction. The new Income Tax Act, 2025 did not explicitly provide for the treatment of prior-period interest. This proposal removes this ambiguity by expressly permitting deduction of prior-period interest. Hence, it ensures continuity of tax treatment and avoids interpretational disputes, rather than conferring any additional tax benefit.”

Hinesh Doshi, chartered accountant, says while this proposal protects taxpayers from losing the existing benefit available under the old law, the govt has still not addressed an important issue. “Please note that pre-construction period interest is not deductible in the year incurred but is spread over five years after possession of property. So, you keep incurring interest expense, but you are devoid of tax benefit till you get the possession of property. As delays in getting the possession of property are quite common, the corresponding tax benefit is also delayed. Also, in the unfortunate event of a housing project not materialising, you end up forgoing your tax benefit entirely. Govt should have allowed deduction of prior-period interest in the year of incurrence,” Doshi said.