Check Pre-EMI Tax Benefits on Housing Loans in 2024

Buying a home is a big step, and understanding how loans and taxes work can save you money. In 2024, there’s a special way to save on taxes if you’re paying interest on a home loan before your house is built. This is called pre-EMI tax benefits. Our guide will help you understand what is pre-emi interest, how pre-emi interest affects your taxes, and how you can make the most of it. If you’re thinking of buying a home or just curious about these benefits, keep reading!

Table of Contents

• What is a Pre-EMI?
• Tax Implications During Pre-EMIs
• Taxes During Pre-EMIs
• Tax Benefits under the Income Tax Act, 1961
• Difference Between Tax Benefits Under Section 80C and Section 24

What is a Pre-EMI?

When you take a home loan for a house that’s still being built, you don’t get the whole loan amount at once. Instead, the loan amount is given out in parts, based on how much of the construction is done. This is because the builder gets paid depending on the progress of the construction.

Now, even though you haven’t received the full loan amount, you still have to start making some payments. This system of payment, known as Pre-EMI, is different from the regular EMI, leading to a common query about full emi vs pre-emi.

They differ from regular EMIs because they only cover the pre-emi interest on housing loans for the portion of the loan disbursed so far, not the entire loan. In simple terms, if you take a loan for a house that’s not finished yet, you start by paying Pre-EMIs, which are smaller payments based on the loan amount you’ve received. Once the house is complete and you get the entire loan amount, you start paying the regular EMIs.

Suggested read: Home Loan Tax Benefit

Understanding Pre-EMIs Tax Benefit Implications

While you’re paying Pre-EMI interest, you might wonder if there’s any relief or tax benefit you can get on this amount. The answer is yes but with a catch. The tax system understands that homeowners need some relief, especially when they’re shouldering the burden of both construction and loan interest. However, this relief or tax deduction on the Pre-EMI interest is not immediate.

You have to wait until the construction of your house is fully completed to start claiming this benefit. But once your house is ready, the doors to tax benefits swing open. The total amount of Pre-EMI interest you’ve paid during the construction period becomes eligible for a pre emi interest on housing loan deduction. But, you can’t claim the entire amount in one go. The system allows you to spread out this deduction over five years. This means you divide the total Pre-EMI interest by five and claim that portion each year for five years.

For a clearer picture, let’s take an example. Suppose you’ve paid a total of Rs.5 lakhs as Pre-EMI interest by the time your house is ready. Instead of getting a tax break on the entire Rs.5 lakhs in one year, you’d get a tax break on Rs.1 lakh each year for the next five years.

It’s essential to note a crucial distinction here. The Pre-EMI is purely the interest component. If, during the construction phase, you started repaying the main loan amount (known as the principal), that amount doesn’t get any tax benefit. Only the interest is considered for this deduction.

Moreover, the tax laws have a specific section, Section 24, that deals with these deductions. Under this section, all the interest you’ve paid until the year the construction is completed is added up. This total interest is the amount you’ll be claiming a deduction on, spread over the next five years.

However, there’s a silver lining for those who start repaying the principal amount after the construction is over. They can claim a tax deduction on that repayment, but there’s an upper limit to this, which is Rs.1 lakh per year.

Taxes During Pre-EMIs

Here’s some crucial information regarding taxes during the pre-EMI period:

1. Tax Treatment: The interest paid during the pre-EMI period cannot be claimed as a deduction immediately in the year it is paid. Unlike regular EMI payments, where you can claim deductions on both the principal and interest, the pre-EMI interest is only deductible under certain conditions.
2. Deduction Eligibility: The interest paid during the pre-EMI period can be accumulated and then claimed as a tax deduction in five equal installments starting from the year in which the construction is completed.
3. Section 24: The deduction for pre-EMI interest is available under Section 24 of the Income Tax Act. The maximum amount eligible for deduction under this section is ₹2 lakhs for a self-occupied property, provided the construction or purchase is completed within 5 years from the end of the financial year in which the loan was taken.
4. No Principal Deduction: During the pre-EMI period, since you are only paying the interest, there is no repayment of the principal amount. Therefore, you cannot claim any deduction under Section 80C for principal repayment during this period.

Suggested read: Tax Benefits on Second Home Loan

Tax Benefits under the Income Tax Act, 1961

Deduction Amount Permitted Under Section 24 for Interest Payment

Completion Status – Completed in 3 years

• Self-Occupied Property: Rs.1,50,000
• Not Self-Occupied Property: No limit

Completion Status – Completed in more than 3 years

• Self-Occupied Property: Rs.30,000
• Not Self-Occupied Property: No limit

Difference Between Tax Benefits Under Section 80C and Section 24

Criteria	Section 80C	Section 24
Purpose	Provides deductions on various investments and expenses.	Specifically provides deductions on home loan interest for a property.
Eligibility	Applies to Purchase or construction of a new house property.	Applies to a loan for purchase, construction, repair or renovation. The construction must be completed within 5 years.
Maximum Deduction Limit	Up to ₹1,50,000 per financial year.	Up to ₹2,00,000 per financial year for self-occupied property; no limit for rented out property.
Types of Investments	Includes principal repayment of home loan, life insurance premiums, PPF, EPF, ELSS, tuition fees, etc.	Only applicable to the interest component of the home loan.
Tax Benefit Type	Deduction from gross total income to arrive at taxable income.	Deduction from gross total income focusing specifically on interest paid on home loans.

Closing Note

Buying a home comes with its challenges, but with the right knowledge, you can make smart choices. The pre-emi interest tax benefit is a great way to ease some financial pressures while your dream home is being built. Remember to always stay informed and seek advice if needed. Your dream home is not just a place to live, but also an investment for your future.

FAQs About Pre-EMI Tax Benefits