Navigating Under Construction Property Tax Benefit

This is one of the most significant deductions for a homebuyer. Section 24 of the Income Tax Act allows you to deduct the interest paid on your home loan. The tax benefits, however, vary significantly depending on the status of your property (self-occupied or let-out).

1. Deduction for Self-Occupied Property 

For a self-occupied property, you can claim a deduction of the interest component of your home loan EMI up to a maximum limit. As per the latest provisions of the revised Income-tax (No. 2) Bill, 2025, this limit has been increased from the previous ₹2 lakh to ₹3 lakh per financial year. This enhanced deduction provides a major boost to tax savings for homeowners, especially those with larger loan amounts and higher interest outgo.

To be eligible for this deduction, the property's construction must be completed within five years from the end of the financial year in which the loan was taken. If the construction period exceeds this five-year window, the deduction limit is reduced to ₹30,000.

2. Deduction for Let-Out Property

If you plan to rent out your property after possession, the tax benefits are even more generous. There is no upper limit on the amount of home loan interest you can claim as a deduction. The entire interest paid for the financial year can be set off against the rental income you receive. Any remaining loss from the house property can be set off against other heads of income, such as salary or business income, up to a maximum of ₹2 lakh per financial year. The balance loss can be carried forward for up to eight subsequent years to be set off against future income from house property.

3. The Crucial Rule of Pre-Construction Interest

A common question for buyers of under-construction properties is about the interest paid before possession. You cannot claim this interest while the property is still under construction. However, the total pre-construction interest paid can be claimed as a deduction in five equal annual installments. This period begins from the financial year in which the construction is completed and you take possession. A significant clarification in the revised Income-tax Bill, 2025, is that this pre-construction interest deduction is now explicitly available for both self-occupied and let-out properties, aligning the provisions with the existing legal framework.

This section is a cornerstone of tax planning for salaried individuals. Section 80C allows a deduction for the principal component of your home loan repayment.

1. Deduction Limit

You can claim a deduction of up to ₹1.5 lakh per financial year. This limit is an overall ceiling for all investments and expenses covered under Section 80C, which also includes Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), life insurance premiums, and more.

2. Conditions

A critical condition for this deduction is that it can only be claimed after the property's construction is complete and you have received possession. Any principal paid during the construction phase is not eligible for this benefit.

4. Stamp Duty and Registration Charges

You can also claim a deduction for stamp duty and registration charges paid, but only in the financial year in which these expenses were incurred. This benefit is also part of the overall ₹1.5 lakh limit under Section 80C.

5. Lock-in Period

To retain the tax benefit claimed under this section, you must not sell the property within five years from the date of possession. If you sell it before this period, the deductions claimed previously will be reversed and added back to your taxable income.

Recognising the need to support first-time buyers, the government has provided additional deductions under specific sections, though these are time-bound.

1. Section 80EE

This section offers an additional deduction of up to ₹50,000 on home loan interest. This is available to first-time homebuyers whose loan was sanctioned between April 1, 2016, and March 31, 2017, for a property valued up to ₹50 lakh and a loan amount not exceeding ₹35 lakh.

2. Section 80EEA

This section was introduced to give a further push to the affordable housing segment. It provides an additional deduction of up to ₹1.5 lakh on the interest component of a home loan. The loan must have been sanctioned between April 1, 2019, and March 31, 2022. To be eligible, the property's stamp duty value must not exceed ₹45 lakh, and the taxpayer should not own any other residential property on the date the loan was sanctioned. This deduction is over and above the limit specified in Section 24.

Beyond income tax, GST is a significant cost component for buyers of under-construction properties. The current GST rates are as follows:

1. Affordable Housing

A concessional rate of 1% is applicable for under-construction properties that qualify as affordable housing. This is without the benefit of Input Tax Credit (ITC) for the builder. Affordable housing is defined as a residential unit with a carpet area of up to 60 sq. m in metro cities or 90 sq. m in non-metro cities and a property value of up to ₹45 lakh.

2. Non-Affordable Housing

For properties that do not fall under the affordable housing criteria, a GST rate of 5% is applicable, also without ITC.

3. GST Calculation

An important aspect of this tax is that GST is not levied on the total property value. Instead, it is calculated on only two-thirds of the property value, with the remaining one-third considered the value of the land, which is GST-exempt.

4. Ready-to-Move Properties

A key point to remember is that there is no GST on ready-to-move properties that have received a completion certificate from the local authority. This makes them a GST-free alternative.

If you are purchasing a property jointly with your spouse, parent, or another family member, a joint home loan can be a powerful tool for tax optimisation.

1. Doubled Deductions

Each co-applicant who is also a co-owner of the property can claim deductions individually, in proportion to their share of the loan repayment.

2. Section 24

Each co-owner can claim a deduction of up to ₹3 lakh on the interest paid, effectively allowing a family to claim a total deduction of up to ₹6 lakh in a financial year for a self-occupied property.

3. Section 80C

Similarly, each co-owner can claim a deduction of up to ₹1.5 lakh for the principal repayment, enabling a family to claim up to ₹3 lakh under this section.

Finally, it is essential to consider the choice between the old and new tax regimes. The tax benefits discussed above, including deductions under Section 24(b) and Section 80C, are primarily available under the old tax regime. For taxpayers who opt for the new, simplified tax regime, these deductions for self-occupied properties are generally not available.

An important exception is for let-out properties. The interest deduction on a let-out property can be claimed under both the old and new tax regimes, though the set-off of the resulting loss against other income remains capped at ₹2 lakh.

Purchasing an under-construction property in India in 2025 can still be a financially rewarding decision, provided you are well-versed in the tax implications. The recent updates to the Income Tax Bill and the existing provisions offer substantial opportunities to reduce your tax liability. By strategically planning your finances, understanding the nuances of pre-construction interest, and leveraging benefits like joint home loans, you can make your path to homeownership more affordable. Partnering with experts like Address Advisors can further simplify this process by guiding you through the legal, financial, and documentation aspects, ensuring you maximize available tax benefits while minimizing risks. As tax laws are subject to change, it is always advisable to consult a qualified tax professional to create a personalized financial strategy that aligns with your specific situation.