Under-Construction Home Loan Tax Benefits: When You Can Claim Deductions and When You Cannot

If you have taken a home loan for an under-construction flat, you generally cannot claim the full tax benefits until the construction is complete and you have received possession. Interest paid in the building phase is not deducted year by year. It is clubbed together and allowed in five equal yearly instalments starting from the year the construction is completed. Livemint has reported a tax expert explaining when such borrowers can claim these benefits.

For the reader, the takeaway is about timing and planning. You can still end up with a meaningful deduction, but only if you keep records of every payment during construction, expect possession within the permitted window, and are still on the old tax regime when you claim. The rules described below are the standing provisions of income tax law as commonly understood, not details taken from the Livemint report, and your own situation may differ. Confirm with a qualified tax adviser before filing.

Key takeaways

• Interest paid before possession is not deductible in the year you pay it. It is totalled and claimed in five equal annual instalments beginning with the year construction is completed.
• For a self-occupied home, the combined yearly interest deduction (current-year interest plus the pre-possession instalment) is capped at ₹2 lakh, provided the home is completed within five years from the end of the financial year in which the loan was taken.
• If completion takes longer than that window, the interest cap drops to ₹30,000 a year, which can wipe out most of the benefit.
• Principal repayment, stamp duty and registration charges qualify under Section 80C (up to ₹1.5 lakh in total with your other 80C investments), but only from the year you are entitled to claim, generally after possession.
• None of these deductions on a self-occupied home apply if you opt for the new tax regime.

How the tax rules for an under-construction home loan work

A home loan gives two separate tax benefits under the old regime. The first is a deduction for interest paid, under Section 24(b) of the Income-tax Act. The second is a deduction for principal repaid, plus stamp duty and registration charges, under Section 80C. Both are tied to owning a house property, and in the eyes of the tax law a flat that is still being built is not yet a house you can live in or let out.

That is why the claim waits. Until the construction is complete, there is no house property income to deduct interest against. The law deals with this by treating the interest you pay in the construction period as pre-construction interest. It is accumulated and then released over five years once the property is completed. Remember that the Income-tax Act, 2025 replaces the 1961 Act from April 2026, and section numbers have been reorganised, so check the current reference when you file, even though the underlying benefit is broadly carried forward.

Pre-possession interest: the five-instalment rule

The period from the date you first borrowed until 31 March just before the year the construction is completed counts as the pre-construction period. All the interest you pay in that period is added up. One-fifth of the total is allowed as a deduction in each of five consecutive years, starting from the financial year in which the construction is completed.

Here is an illustrative calculation. Suppose you take a ₹50 lakh loan at 8.5% and, for simplicity, assume the whole amount is disbursed at the outset. Real loans are usually disbursed in stages as construction advances, so your actual figure will be lower.

Item	Working	Amount
Yearly interest on ₹50 lakh at 8.5%	50,00,000 × 8.5%	₹4,25,000
Interest over 3 years of construction	4,25,000 × 3	₹12,75,000
Yearly pre-possession instalment	12,75,000 ÷ 5	₹2,55,000
Interest paid in the year after possession	Say, roughly	₹4,20,000
Total eligible before cap	2,55,000 + 4,20,000	₹6,75,000
Deduction actually allowed (self-occupied)	Cap	₹2,00,000

The example shows an uncomfortable feature of the rule. The cap applies to the combined total, so in many cases a large part of the pre-possession interest is never used. A buyer with a smaller loan or a shorter construction period may fit within the cap, while a buyer with a large loan may not.

The five-year completion window and the ₹30,000 trap

The ₹2 lakh ceiling for a self-occupied home applies only if the acquisition or construction is completed within five years from the end of the financial year in which the loan was taken. If you borrowed in, say, October of a given year, the clock effectively runs to 31 March five years after the end of that financial year. If the project is delayed beyond the window, the cap on the interest deduction falls to ₹30,000 a year.

This matters because builder delays are common in Indian real estate. A buyer who has priced the tax benefit into the purchase decision may find it largely gone. Completion is generally judged by when the completion or occupancy certificate is obtained, or when the property is actually put to use, so keep proof of the date.

Situation	Interest deduction cap per year	Typical tax saved at 31.2%
Completed within the window, self-occupied	₹2,00,000	₹62,400
Completed after the window, self-occupied	₹30,000	₹9,360
Let out (old regime)	Actual interest, but the loss set against other income is capped at ₹2 lakh	Depends on rent and slab

Principal, stamp duty and Section 80C

Under Section 80C, repayment of the principal on a home loan, along with stamp duty and registration charges paid in the year of purchase, is eligible for deduction up to the overall ₹1.5 lakh limit, which is shared with your provident fund, life insurance premiums, tax-saving fixed deposits and similar items. For an under-construction property, the claim generally becomes available only after possession, so the principal you repay during construction is not deductible at the time.

There is a condition to watch. If you sell the property within five years from the end of the financial year in which you got possession, the 80C deductions you have already claimed are reversed and taxed as income in the year of sale. Interest deductions are treated differently, so ask your adviser how a sale would affect your own claims.

For a buyer in the 30% slab, a full ₹1.5 lakh deduction saves about ₹46,800 including cess. Many salaried borrowers already exhaust the limit through their provident fund, so the home loan principal may add little extra.

Who benefits and who does not

Likely to benefit:

• Buyers who stay on the old tax regime and are in the 20% or 30% slab.
• Buyers whose builders are close to the possession date, so the five-year window is safe.
• Buyers with moderate loans, whose combined interest fits comfortably within the ₹2 lakh cap.

Likely to benefit little or not at all:

• Buyers who have chosen the new tax regime, which does not allow the deduction on a self-occupied home.
• Buyers in projects that are delayed past the five-year window.
• Buyers with large loans, where most of the pre-possession interest exceeds the cap.
• Borrowers who earlier relied on the extra deduction for affordable housing loans under Section 80EEA, which applied only to loans sanctioned up to 31 March 2022 and cannot be claimed on newer loans.

If you are comparing whether a larger EMI is manageable, use the EMI calculator to see the full outgo, and check current lending bands on the interest rates page before you decide.

What to do now: a checklist for under-construction buyers

1. Get the interest certificate every year. Ask your lender for a certificate that separates interest from principal. For an under-construction loan, ask for the pre-possession interest to be shown separately.
2. Keep a running ledger. Note every disbursement, EMI or pre-EMI, and the financial year in which it fell, so the pre-construction total can be calculated precisely later.
3. Track the possession date. Record the builder's promised date, the actual completion certificate date and the date you took possession.
4. Compare tax regimes each year. Work out your tax under both regimes with your actual numbers. The old regime pays off only when your total deductions are large enough.
5. Plan 80C early. If provident fund and insurance already use the limit, do not count on the home loan principal for extra savings.
6. Check the loan agreement. Make sure it is clear who is the borrower and who is the owner. For joint loans, each co-owner who is also a co-borrower can claim their own share within the limits.
7. Use the home loan guides. Read the home loan pages for EMI and eligibility details, and the eligibility tool if you want to check how much you can borrow.

Common mistakes to avoid

• Claiming interest during construction. Deducting the interest in the year you pay it, before possession, invites a notice from the tax department.
• Ignoring the five-year window. Assuming the ₹2 lakh cap is automatic, when a delayed project may only qualify for ₹30,000.
• Missing documents. Claims without a lender certificate and proof of possession are hard to defend if scrutinised.
• Forgetting the new regime. Switching to the new regime in a year when you have home loan interest means you lose the deduction for that year.
• Assuming joint ownership doubles the cap automatically. Each co-owner is limited to their own cap, and only if they are also paying the loan and are co-owners.

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Frequently asked questions

Can I claim home loan tax benefits while my flat is still under construction?

Not in the usual way. Interest paid before possession is accumulated and allowed in five equal instalments from the year construction is completed. Principal repayment under Section 80C is generally claimed only after possession, so there is no immediate deduction during the construction phase.

How much interest can I claim on a self-occupied home?

Up to ₹2 lakh a year under the old tax regime, covering the current year's interest and the pre-possession instalment together. This holds if the home is completed within five years from the end of the financial year in which the loan was taken. If the project is completed later, the cap falls to ₹30,000.

Does the new tax regime allow these deductions?

No. The new regime does not allow a deduction for interest on a self-occupied home or the Section 80C deduction. Interest on a let-out property can still be set off against rental income. You need to compare your total tax under both regimes each year before choosing.

What happens if the builder delays possession beyond five years?

The yearly interest cap on a self-occupied home falls from ₹2 lakh to ₹30,000, so most of the benefit is lost. Keep the builder's communications and the completion certificate date on file. A tax adviser can tell you how the delay affects your particular claim.

Can both co-borrowers claim the deduction?

Yes, if both are co-owners and both are repaying the loan. Each can claim within their own limits, depending on their share of ownership and repayment. The documents should show each person's name and payments clearly.