Income Tax Benefits Applicable on Pre-EMIs

A housing loan has to be repaid within a specified number of months through equated monthly installments (EMIs).

EMI is the monthly payment you make on your housing loan. It is a arrived at with interest & principal components.

The total monthly amount is calculated in such a way that it remains constant all through the repayment tenure.

EMI begins when the loan is fully disbursed. Once your bank makes the entire loan payment, you begin repayment through EMIs.

The amount of EMI to be paid depends on the amount of loan, tenure, rate of interest, and mode of calculation of interest. Longer the tenure, lower is the EMI. Shorter the tenure, higher is the EMI.

At the same time, it is to be noted that in case of longer tenures, during the initial period, the interest component is more &  the principal component is less.

Over the years, it gets reversed & the principal component becomes more while the interest element becomes less. This is because in the initial phase the loan amount outstanding is more as compared to the later years.

Pre-EMI is relevant when the building's construction is not yet completed. When the building is under construction, the builder may be paid depending on the stages of construction.

The entire sum for the home is not disbursed to the builder / promoter. A partial disbursement happens linked to stages of construction. The actual loan repayment will start only when the entire loan amount is disbursed to the builder.

During the period of partial disbursements you will have to pay pre-EMIs. Only the interest accrued on the disbursed money is paid.

Tax deduction for the preconstruction period, on the pre - EMIs, can be availed only after the construction of the building has been completed.

Once the construction is completed, the total pre-EMI interest paid is deductible in five (5) equal installments in the subsequent years.

For example, if you have paid Rs. 5 lakhs as the pre-EMIs, then Rs. 1 lakh will be shown in the next five (5) years as tax deduction. Pre-EMI is only the interest paid during the period. If you have paid any principal amount, it is not eligible for tax deduction.

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.

The entire interest payable is deductible under this Section.

All interest payable in respect of periods up to the year of construction is required to be aggregated and is allowed as a deduction in five equal instalments beginning from the year in which the construction is completed.

Capital repayments on the loan, if any, made in the years during which the property remained under construction are not eligible for any deduction.

However, capital repayments on a home loan made in the years after the construction of the property has been completed are eligible for deduction up to a limit of Rs. 1 lakh per annum.

Src: ET

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