Check Pre-EMI Tax Benefits on Housing Loans in 2024

Check Pre-EMI Tax Benefits on Housing Loans in 2023

6 mins read

Last updated on 15th April 2024

Buying a home is a big step, and understanding how loans and taxes work can save you money. In 2023, there's a special way to save on taxes if you're paying interest on a home loan before your house is built. This is called pre-EMI tax benefits. Our guide will help you understand what is pre-emi interest, how pre-emi interest affects your taxes, and how you can make the most of it. If you're thinking of buying a home or just curious about these benefits, keep reading!

Table of Contents

What is a Pre-EMI?

When you take a home loan for a house that's still being built, you don't get the whole loan amount at once. Instead, the loan amount is given out in parts, based on how much of the construction is done. This is because the builder gets paid depending on the progress of the construction.

Now, even though you haven't received the full loan amount, you still have to start making some payments. This system of payment, known as Pre-EMI, is different from the regular EMI, leading to a common query about full emi vs pre-emi.

They differ from regular EMIs because they only cover the pre-emi interest on housing loans for the portion of the loan disbursed so far, not the entire loan. In simple terms, if you take a loan for a house that's not finished yet, you start by paying Pre-EMIs, which are smaller payments based on the loan amount you've received. Once the house is complete and you get the entire loan amount, you start paying the regular EMIs.

Suggested read: Home Loan Tax Benefit

Understanding Pre-EMIs Tax Benefit Implications

While you're paying Pre-EMI interest, you might wonder if there's any relief or tax benefit you can get on this amount. The answer is yes but with a catch. The tax system understands that homeowners need some relief, especially when they're shouldering the burden of both construction and loan interest. However, this relief or tax deduction on the Pre-EMI interest is not immediate.

You have to wait until the construction of your house is fully completed to start claiming this benefit. But once your house is ready, the doors to tax benefits swing open. The total amount of Pre-EMI interest you've paid during the construction period becomes eligible for a pre emi interest on housing loan deduction. But, you can't claim the entire amount in one go. The system allows you to spread out this deduction over five years. This means you divide the total Pre-EMI interest by five and claim that portion each year for five years.

For a clearer picture, let's take an example. Suppose you've paid a total of Rs.5 lakhs as Pre-EMI interest by the time your house is ready. Instead of getting a tax break on the entire Rs.5 lakhs in one year, you'd get a tax break on Rs.1 lakh each year for the next five years.

It's essential to note a crucial distinction here. The Pre-EMI is purely the interest component. If, during the construction phase, you started repaying the main loan amount (known as the principal), that amount doesn't get any tax benefit. Only the interest is considered for this deduction.

Moreover, the tax laws have a specific section, Section 24, that deals with these deductions. Under this section, all the interest you've paid until the year the construction is completed is added up. This total interest is the amount you'll be claiming a deduction on, spread over the next five years.

However, there's a silver lining for those who start repaying the principal amount after the construction is over. They can claim a tax deduction on that repayment, but there's an upper limit to this, which is Rs.1 lakh per year.

Suggested read: Tax Benefits on Second Home Loan

Tax Benefits under the Income Tax Act, 1961

Deduction Amount Permitted Under Section 24 for Interest Payment

Completion Status - Completed in 3 years

  • Self-Occupied Property: Rs.1,50,000
  • Not Self-Occupied Property: No limit

Completion Status - Completed in more than 3 years

  • Self-Occupied Property: Rs.30,000
  • Not Self-Occupied Property: No limit

Difference Between Tax Benefits Under Section 80C and Section 24

Tax deduction applicable for

  • Section 80C: Principal
  • Section 24: Interest

Tax deduction basis

  • Section 80C: Paid
  • Section 24: Accrual

Total amount of tax deduction applicable

  • Section 80C: Rs.1.5 lakh
  • Section 24:
    • Self-occupied property: Rs. 2,00,000
    • Non-self-occupied property: No limit

Loan offered for

  • Section 80C: Purchase or construction of a new house property
  • Section 24: Construction, reconstruction, repair, renewal, or purchase of a residential property

Tax deduction eligibility criteria

  • Section 80C: Nil
  • Section 24: Construction or purchase has to be completed within 3 years

Restriction on the sale of property

  • Section 80C: Tax deductions claimed are subject to be reversed if the property is sold within 5 years
  • Section 24: Nil

Closing Note

Buying a home comes with its challenges, but with the right knowledge, you can make smart choices. The pre-emi interest tax benefit is a great way to ease some financial pressures while your dream home is being built. Remember to always stay informed and seek advice if needed. Your dream home is not just a place to live, but also an investment for your future.

FAQs About Pre-EMI Tax Benefits

Yes, pre-EMI interest is eligible for tax deductions after the construction is completed, spread over five years.

Yes, the interest paid during the pre-construction period (pre-EMI) can be claimed in five equal installments post-construction.

No, tax benefits on pre-EMI interest can only be claimed after the construction is completed.

Pre-EMI allows borrowers to pay only the interest component until full disbursement, reducing the financial burden during the construction phase.

It's the interest paid during the pre-construction period, which qualifies for tax deductions after the construction is completed.

A pre-approved EMI refers to a loan amount sanctioned by the lender even before the borrower finalizes the property, based on their creditworthiness.

Pre-EMI interest can be claimed under Section 24 of the Income Tax Act, in five equal installments, starting from the year the construction is completed.

No, pre-EMI interest is not exempt, but it is eligible for tax deductions after the construction of the property is completed.

Published on 31st August 2023