Budget 2026: Tax Rules for Pre-Construction Interest on Home Loans Explained

If you have taken a home loan for an under-construction property, Budget 2026 has clarified that pre-construction interest is eligible for tax deduction, but only within the ₹2 lakh annual cap for self-occupied homes. This interest can be claimed in five equal instalments after possession, bringing much-needed clarity for homebuyers and investors.

This update clarifies the tax benefits for under-construction properties, enabling borrowers to plan their tax strategy more effectively.

What Is Pre-Construction Interest in a Home Loan?

What does “pre-construction interest” mean?

Pre-construction interest refers to the interest paid on a home loan during the construction period—that is, after the loan is sanctioned but before you receive possession of the property.

Why can’t it be claimed immediately?

Since the property is not completed, the Income Tax Act does not allow you to claim deductions on this interest during the construction phase.

Instead, you can claim it only after possession, spread over five years.

Example:

• Loan taken: ₹50 lakh
• Pre-construction interest paid: ₹1.5 lakh
• Deduction allowed: ₹30,000 per year for 5 years (subject to ₹2 lakh cap)

Also Read: How to Check Home Loan Eligibility Before Applying in India?

What Did Budget 2026 Clarify About Home Loan Tax Benefits?

Key clarification introduced in Budget 2026

Budget 2026 clarified that:

• Pre-construction interest is deductible in five equal instalments
• The deduction is included within the ₹2 lakh annual limit for self-occupied properties
• It is not an additional deduction over ₹2 lakh

Why is this clarification important?

Earlier, there was confusion about whether pre-construction interest would be allowed over and above the ₹2 lakh limit under the new tax framework.

Budget 2026 aligned the new law with existing provisions, removing ambiguity.

How Does the ₹2 Lakh Deduction Limit Work?

Deduction limit for self-occupied property

For self-occupied homes:

This means:

Even if your total interest (current + pre-construction) exceeds ₹2 lakh, you can claim only ₹2 lakh per year.

Real-Life Example: Under-Construction Home Loan Tax Calculation

Case Study 1: Self-Occupied Property

Borrower: Kushal Sharma
Loan Amount: ₹50 lakh
Pre-construction interest: ₹1.5 lakh
Annual interest after possession: ₹2.2 lakh

Calculation:

• Pre-construction interest per year = ₹1.5 lakh ÷ 5 = ₹30,000
• Total interest = ₹2.2 lakh + ₹30,000 = ₹2.5 lakh
• Allowed deduction = ₹2 lakh (cap applies)

Result: Only ₹2 lakh can be claimed, not ₹2.5 lakh.

Old Tax Regime vs New Tax Regime: Which Is Better for Homebuyers?

Old Tax Regime Benefits

Under the old regime, you can claim:

• ₹2 lakh deduction on home loan interest (Section 24b)
• ₹1.5 lakh deduction on principal repayment (Section 80C)

New Tax Regime Benefits

Under the new regime:

• No deduction for home loan interest on self-occupied property
• No deduction under Section 80C
• Lower tax rates

Comparison Table

When Does the Old Tax Regime Make More Sense?

The old regime is beneficial if:

• You have a large home loan
• Interest payments are high
• You invest in 80C instruments (PF, ELSS, LIC, etc.)

Example:

If your annual deductions exceed ₹3 lakh, the old regime usually results in lower tax.

How Budget 2026 Impacts Under-Construction Homebuyers

Positive Impacts

Clear tax rules
Better financial planning
Reduced confusion between old and new regimes
Predictable tax benefits

Limitations

₹2 lakh cap still restricts benefits
Delayed possession reduces tax efficiency
Inflation and rising interest rates reduce real benefits

What About Let-Out (Rental) Properties?

Tax rules for rental properties

For let-out properties:

• No upper limit on interest deduction
• Full interest can be deducted from rental income
• 30% standard deduction allowed

Example:

Borrower: Amit Sharma
Annual interest paid: ₹4.5 lakh
Rental income: ₹6 lakh

Calculation:

• Interest deduction = ₹4.5 lakh
• Standard deduction (30%) = ₹1.8 lakh
• Taxable income = ₹6 lakh – ₹4.5 lakh – ₹1.8 lakh =  Loss

Result: Lower tax liability and higher post-tax cash flow.

Why Budget 2026 Favors Property Investors Over End-Users

For end-users (self-occupied homes):

• Limited tax benefits
• ₹2 lakh cap restricts deductions

For investors (rental properties):

• Unlimited interest deduction
• Higher tax efficiency
• Better ROI

This makes real estate investment more attractive than self-occupied ownership from a tax perspective.

Also Read: What Is a Loan for Home Extension? Benefits, Eligibility & Application Process

How Should Homebuyers Plan Their Tax Strategy After Budget 2026?

Step-by-step approach

Calculate total home loan interest
Compare tax liability under both regimes
Include pre-construction interest in projections
Evaluate long-term tax savings
Consider rental vs self-occupied strategy

Key Takeaways for Under-Construction Property Buyers

• Pre-construction interest is deductible in five instalments after possession.
• The ₹2 lakh annual cap applies to total interest for self-occupied homes.
• Old tax regime benefits borrowers with high home loan outgo.
• New regime benefits rental property investors more.
• Always compare tax liability before choosing a regime.

Conclusion

Budget 2026 has removed ambiguity around tax treatment of pre-construction interest on home loans for under-construction properties. While the clarification brings certainty, the ₹2 lakh deduction cap continues to limit tax benefits for self-occupied homeowners.

For end-users, tax planning has become more important than ever. For investors, the new regime offers significant advantages, especially for rental properties.

Ultimately, the best tax strategy depends on your income level, loan amount, and long-term financial goals making personalized calculation essential before choosing between the old and new tax regimes.