Taken a home loan for an under-construction property? Budget 2026 clarifies tax treatment of pre-construction interest

Budget 2026 has brought clarity for homebuyers of under-construction flats by including pre-construction interest on home loans within the ₹2 lakh deduction cap

Ahmedabad-based Kushal Sharma took a ₹50 lakh home loan for an under-construction, self-occupied property and paid ₹1.5 lakh in interest before taking possession. Budget 2026 has clarified that such prior-period (pre-construction) interest can be claimed in five equal instalments after the completion of construction.

However, the total annual deduction for home-loan interest on a self-occupied property, including pre-construction interest, remains capped at ₹2 lakh. This means that while Sharma can spread the tax benefit over multiple years, the overall deduction will stay within the prescribed limit.

Budget 2026 offers clarity to under-construction homebuyers by bringing pre-construction interest within the ₹2 lakh deduction cap (Photo for representational purposes only) (Pixabay)

The clarification in Budget 2026 brings much-needed certainty for homebuyers who have taken loans for under-construction properties, confirming that prior-period interest is deductible in five equal instalments post completion, but must be claimed within the ₹2 lakh annual cap for self-occupied homes.

“Under the new act, the prior period interest deduction is inserted as an addition to an annual interest deduction of ₹2 lakh. However, the Budget aligns the said provisions with the Old Act, thereby restricting the overall threshold for interest deduction to ₹2 lakh,” says Jayesh Agrawal, Partner, International Tax and Transaction Services, EY India.

Prior period interest refers to the home-loan interest you pay during the construction period, after taking the loan but before you get possession of the house. Since the property is not yet complete, this interest cannot be claimed as a tax deduction in those years.

Once construction is completed and the buyer gets possession, the total interest paid during the construction phase can be claimed as a deduction in five equal annual instalments. This deduction is included within the overall ₹2 lakh annual cap for a self-occupied house.

“For self-occupied property, considering the continuous representation for increasing the interest deduction limit of ₹2 lakhs, inadvertently mentioning in the new Income Tax Act that the pre-construction interest is over and above the ₹2 lakh was exciting. Thus, the Budget 2026 proposal rectifying the previous error and aligning the new income tax with existing provisions is disappointing,” says Agrawal

The Budget’s clarification that pre-construction interest now falls squarely within the existing ₹2 lakh home-loan interest deduction cap provides clarity for homebuyers who have taken a loan for an under-construction property. Before this clarification, there was ambiguity about whether prior-period interest would be excluded from the limit under the new tax law.

The provision allowing prior-period interest to be spread over five years provides some relief to those who have been waiting long periods for possession, but it is only partial.

Says Pramod Kathuria, founder and CEO, Easiloan, “Although the five-year spread of prior-period interest may ease cash flow concerns to some extent, it is always limited by the existing deduction cap, particularly for homebuyers who are already experiencing possession delays.”

Do the math before choosing between the old and the new regime

Under the old regime, borrowers could claim an annual interest deduction of ₹ 2 lakh for a self-occupied home. They can also benefit from principal repayment deductions under Section 80C. However, the 80C deductions come with a cap of ₹1.5 lakh, and it can be used to claim other deductions.

These deductions are not available in the new tax regime. This means that the old tax regime makes sense only to those with a significant home loan outgo, especially during the early years when interest rates are high.

That said, homeowners cannot assume the old regime will automatically result in lower taxes. Those servicing a home loan should calculate their total tax liability under both regimes before making a choice, factoring in interest payments, principal repayment, and other eligible deductions.

Surya Singh, based in Siliguri, West Bengal, has taken a home loan for his self-occupied house. Under the old tax regime, he can claim up to ₹2 lakh as a deduction on home-loan interest and also claim principal repayment under Section 80C, within the overall cap of ₹1.5 lakh, shared with other investments.

After calculating his tax liability under both options, he finds that the old tax regime still results in lower tax outgo, mainly because his interest payments are high in the early years of the loan. He, therefore, continues with the old regime for now.

However, every taxpayer’s optimal choice depends on their overall income, deductions, and financial goals, so this is not a one-size-fits-all outcome.

“Now that home loan deductions are no longer ambiguous under the new tax regime, the difference between the old and new tax regimes is primarily dependent on one’s overall tax situation and not just home loan benefits,” says Kathuria.

New regime favours rental homes

The new tax regime favours rental income, as full home loan interest on let-out properties can be deducted from rent, improving post-tax cash flows for property investors. For investors who rely on rental income or own multiple properties, the new regime is a more efficient option from a tax perspective.

Unlike self-occupied homes, where interest deductions are not available under the new tax regime, rented properties are subject to no upper limit on home-loan interest deductions. In addition, owners are eligible for a 30% standard deduction for repairs and maintenance, even if no actual expenses are incurred. By lowering taxable income, these provisions improve post-tax cash flows, increasing the share of rental income retained after taxes.

Jaipur–based Amit Sharma owns two rented flats funded by home loans. Under the new tax regime, he deducts the full amount of interest paid on rental income, with no upper limit, and also claims a 30% standard deduction. This lowers his taxable income and boosts post-tax cash flow.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics