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Housing Loan & Tax Treatment of Pre-Construction Period Interest

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Query 1] We have booked an under-construction flat for Rs. 1.65 Cr in May 23. The amount of Rs. 21 Lakh was given at the time of booking and have availed of the housing loan for balance of Rs. 1.44 Cr. The flat is booked in joint name with my wife. We both are working and are presently in the 30% tax bracket with investment of more than Rs. 1.50 Lakh in LIC & PPF. The bank has disbursed Rs. 90 Lakh till 31/01/24 & likely to disburse another 15 Lakh by March-24. The balance amount is expected to be disbursed by June– 24 at the time of giving the possession of the property by the builder. Interest amount for FY 2023-24 is estimated at Rs. 4.14 Lakh. Please guide:

  1. Whether we both can claim the deduction towards housing loan interest in the FY 2023-24 even if the loan is not completely disbursed?
  2. Whether it is advisable for us to opt for the new tax regime?
  3. If we opt for a new tax regime for the current year, can we opt for the old regime in the next financial year?
  4. If I earn LTCG on shares of Rs. 1.80 Lakh, whether I will be required to pay the tax @10% on Rs. 1.80 Lakh or only on Rs. 80,000/-? 

Opinion:

  1. Interest on housing loan taken for under-construction flat:
    a) Interest paid on the amount borrowed for purchase/construction of house is eligible for deduction u/s 24(b) of the Income Tax Act-1961 up to a maximum of Rs. 2  Lacs p.a. in case of self occupied house property.

The deduction would be admissible only after the construction of the house property. Mere payment of interest on a housing loan taken for purchase of an “under-construction” project is not eligible for deduction. It’s only after the completion of the construction & handover of the possession, deduction would be admissible. No deduction towards interest of Rs. 4.14 Lakh shall be admissible in the FY 2023-24. The interest of Rs. 4.14 Lakh shall be reckoned as pre-construction period interest.
b) “Pre-construction period” means the period commencing on the date of borrowing the amount and ending on 31st March immediately prior to the date of completion of construction /acquisition. In your case, if you take the possession of the flat in May-2024, preconstruction interest would mean interest for the period commencing from the date of availing loan to 31st March 2024.

  1. c) As far as deduction towards interest of pre-construction is concerned, it is deductible in five equal annual installments commencing from the year in which the construction is completed. [There is one major drawback in case the house property is not completed within a period of 5 years. In such a case, deduction towards interest on borrowed capital is restricted to Rs. 30,000/- only & not Rs. 2 Lakh otherwise available in case of self occupied house property].
  2. Which Tax Regime is better?
    a) Both tax regimes have their own sets of pros and cons. The choice of tax regime would necessarily be dependent on (i) Applicable  Income slab of every individual (ii) Extent of exemptions and deduction available with the taxpayers (iii) Alternate investments options & returns thereon if taxpayers prefer not to opt for the new regime (iv)  Short term and long term financial goals of the taxpayers, etc.
  1. b) Before opting for any particular tax regime, taxpayers must calculate the total income tax under the old as well as new regime individually to decide which tax regime is more beneficial.
  2. c)As a general rule, if the amount of deduction and exemption exceeds Rs. 3.75 Lakh for any category of the taxpayers with income not exceeding Rs. 5 Cr., the old regime may be more beneficial.
  3. d) Individual taxpayers with income exceeding Rs. 5 Cr will be benefitted by the reduction in the rate of surcharge and may prefer the new tax regime only.
  1. Salaried taxpayers without any business income will have a free entry & free exit option in the new /old regime. Decisions can be taken in isolation every year as per the income, deductions and exemptions of every year. If you opt for a new tax regime for the current year, you can very well opt for the old regime in the next financial year.
  2. Any Long Term Capital Gain on transfer of shares is eligible for blanket exemption of Rs. 1 Lakh. Tax @ 10% is payable on an amount exceeding Rs. 1 Lakh. In your case, LTCG @ 10% would be applicable on an amount of Rs. 80,000/- only.