The Hidden Tax Trap in Under-Construction Homes: What Buyers Often Miss

• Home-loan interest during construction offers no immediate tax relief

• Delays beyond five years sharply reduce allowable deductions

• Ready-to-move-in homes often deliver better post-tax outcomes

Buying an under-construction home is often marketed as a smart financial move. Lower prices, staggered payment plans, and the promise of capital appreciation make such properties appealing to first-time buyers and investors alike. However, a lesser-known tax rule tied to construction timelines can significantly reduce the expected benefits—sometimes wiping out most home-loan interest deductions.

Under current income tax provisions, interest paid on a home loan during the construction phase does not qualify for deduction in the years it is paid. This amount, known as pre-construction interest, becomes claimable only after the project is completed and possession is handed over.

Once construction is completed, buyers can claim the accumulated pre-construction interest in five equal annual instalments. These instalments begin from the year of completion and are added to the interest paid in the current financial year. On paper, this appears straightforward. In practice, delays can turn this mechanism into a costly disadvantage.

The key factor that determines tax efficiency is whether the property is completed within five years from the end of the financial year in which the home loan was taken. If the builder meets this deadline, self-occupied homeowners can claim up to ₹2 lakh per year as interest deduction, inclusive of both current interest and the pre-construction instalment. For rented properties, the full interest amount is deductible, although the annual loss set-off against other income is capped at ₹2 lakh.

The problem arises when construction stretches beyond the five-year limit. In such cases, the maximum interest deduction for a self-occupied home drops sharply to just ₹30,000 per year, regardless of how much interest the buyer has actually paid. While rented properties continue to allow full interest deduction, the restriction on setting off losses remains unchanged.

The impact of this rule becomes clearer through a practical example. Consider a buyer who takes a ₹50 lakh home loan at 9% interest for a self-occupied apartment that takes six years to complete. Over this period, the buyer pays around ₹26 lakh in interest. Due to the delay crossing the five-year threshold, the allowable deduction shrinks to just ₹30,000 per year over five years—amounting to ₹1.5 lakh in total. This means nearly ₹24.5 lakh of interest receives no tax benefit at all.

In contrast, a buyer who purchases a ready-to-move-in home with the same loan terms can claim up to ₹2 lakh in deductions annually. Over six years, this results in total deductions of ₹12 lakh and tax savings of about ₹3.6 lakh for someone in the 30% tax bracket. The effective interest cost in this case is significantly lower.

Another layer of complexity comes from the new tax regime. Under this system, no interest deduction is allowed for self-occupied properties. For rented homes, interest can still be deducted, but losses can only be adjusted against rental income, not other sources.

For homebuyers, the takeaway is clear. Construction delays do not just affect possession dates—they have long-term financial and tax consequences. While under-construction homes may appear cheaper initially, ready-to-move-in properties often provide better tax efficiency and lower effective borrowing costs.

Before committing to an under-construction project, buyers should assess not only the price and potential appreciation but also the developer’s delivery track record and the tax impact of possible delays. What looks like a bargain today can turn into an expensive tax lesson tomorrow.