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Tax Implication On Pre EMI

Tax deduction benefits are available from the financial year in which the construction is completed

Apnaloan.com Research Bureau

10 Aug 2007

An underconstruction property was bought in August 2004 with disbursement being made in stages, till final disbursement. The possession will be provided on January 31, 2007. Pre EMI interest is being paid to the bank, currently. Is Pre-EMI interest deductible for income tax purposes? If yes, in what manner?

 All interest payable in respect of the year during which the construction is completed, (including interest payable for the period during which the construction was still to be completed in that year) is deductible under Section 24. In this case, the entire interest payable from April 1, 2006 onwards, is deductible under this section; irrespective of the fact that, for 10 months in that year (that will end on March 31, 2007)-the property was under construction. All interest payable in respect of periods up to March 31, 2006, will be aggregated and allowed as a deduction in five equal installments beginning from the year in which the construction is completed.

Capital repayments, on the loan, if any, made in years in which the property remained under construction-re not eligible for any deduction. The position can be summarized as under:

Later years (year ended March 31, 2012 and later years in our example)
  Period Deduction for Interest payable

Deduction for Capital portion repaid or stamp duty/ registration charges

                                                 (1)                        (2)                       (3)                       (4)
1. Years in which construction is still to be completed (up to March 31, 2006 in our example) No deduction is permissible No deduction available. Any payment made on this account is lost forever Pre-EMI Interest payable to be aggregated to be allowed as deduction in later years. Aggregate interest payable taken as (X)
2. Year in which construction is completed (year ending March 31, 2007 in our example) and 4 subsequent years (i.e. up to and including the year ending on March 31, 2011 in our example) Interest payable for the full year (including pre-EMI interest payable for the year) plus 1/5th of (X) Available up to the overall limit of Rs. 1,00,000 For properties given out on rent there is no upper limit on the deduction under column (2). For self occupied properties the maximum limit is Rs. 1, 50,000 or Rs. 30,000 depending on the length of the construction period.
3.   Interest payable for the full year Available up to the overall limit of Rs. 1,00,000 Same as (2)

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