If you avail of a home loan for buying an under-construction apartment, the tax law provides for a deferred deduction on interest payable during the pre-construction period. The total amount can be availed of as deduction in equal installments over five years starting from the financial year in which the construction is completed.
Pre-construction phase is defined as the period starting from the date of borrowing and ending on March 31 immediately preceding the year in which construction is completed. For instance, if you have taken a loan in June 2008 and the construction is completed in May 2010, the period from June 2008 to March 31, 2010 will be deemed to be the pre-construction period.
Now, let’s assume the total loan amount is Rs 40 lakh, borrowed at the rate of 10% per annum. If the total interest payable for the pre-period is Rs 5 lakh, 20% of the amount — Rs 1 lakh — can be added to the interest component of each of the five years, starting from the year in which the construction is completed.
If your house is self-occupied, the deduction on interest payable would be restricted to Rs 1,50,000 per financial year. Also, it needs to be noted that deduction on repayment of principal amount can be claimed under section 80C only from the financial year in which construction is completed.