Whalesbook
Clarifying Ambiguity in New Tax Law
The new Income Tax Act 2025, set to take effect April 1, introduced ambiguity regarding the treatment of interest paid on housing loans during the construction phase. Budget 2026 has now stepped in to resolve this uncertainty, proposing that this "prior-period interest" will continue to qualify for deduction from house property income, mirroring the existing provisions under the Income Tax Act 1961.
Existing Deduction Mechanism
Currently, homeowners can claim deductions for interest incurred before a property is completed or acquired. This deduction is typically spread across five equal annual installments, commencing from the financial year in which the property is acquired or construction is completed. For self-occupied properties, there is a maximum annual deduction limit of ₹2 lakh, while no such cap applies to let-out properties. This clarification assures many families, especially in major urban centers, who have booked flats under construction.
Expert Views on Limitations
While the clarification provides continuity and avoids interpretational disputes, experts emphasize that it does not introduce any new or enhanced tax benefits. Ameet Patel, partner at Manohar Chowdhry and Associates, stated that the proposal simply preserves the existing treatment rather than conferring additional advantages. Hinesh Doshi, a chartered accountant, pointed out that the core issue of the delayed tax benefit persists. Borrowers continue to incur interest expenses for years before taking possession, and consequently, the tax benefit is also deferred. This delay, coupled with the risk of housing projects not materializing, means taxpayers could potentially forgo their tax benefits entirely if projects fail.