Interest on borrowed capital for house property, and pre-construction interest under both regimes

Deduction for interest on borrowed capital

Where a house property is acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the interest payable on that capital is deducted in computing income from house property (Income-tax Act, 2025, section 22(1)(b); formerly section 24(b)). The deduction is for interest payable, whether or not it is actually paid in the year, and covers interest on a fresh loan taken to repay the original loan. "Interest" is defined widely: it includes any service fee or other charge for the money borrowed (section 2(59)), so a loan-processing fee counts as interest and is deductible with it, subject to the same conditions and ceilings. Interest payable outside India that is chargeable under this Act is not deductible at all if tax has been neither paid nor deducted on it under Chapter XIX-B and there is no agent in India for it under section 306 (section 22(6)).

Self-occupied property

The annual value of up to two houses occupied by the owner for his own residence, or which he cannot actually occupy for any reason, is nil (section 21(6)); the two are the houses the assessee specifies (section 21(7)(a)). The value is not nil for a house, or part of one, that is actually let at any time in the tax year or from which the owner derives any other benefit (section 21(7)(b)). For these, the current year's interest under section 22(1)(b) and the pre-construction instalment under section 22(1)(c) are together allowed only up to a ceiling (section 22(2), as amended by Finance Act, 2026, section 38):

• ₹2,00,000 where the capital is borrowed to acquire or construct the house, the acquisition or construction is completed within five years after the close of the tax year of borrowing, and he furnishes a certificate of the interest payable from the lender (section 22(2)(a)(ii)) (and, where a fresh loan was taken to repay it, of the interest on the new loan, section 22(4));
• ₹30,000 in any other case, for example where the loan is for repairs or the construction is not completed in five years. The aggregate deduction for both self-occupied houses together cannot exceed ₹2,00,000 (section 22(5)). Since the annual value is nil, the interest results in a loss from house property. Unlike section 24(b) of the 1961 Act, section 22(2) of the 2025 Act does not confine the ₹2,00,000 ceiling to capital borrowed on or after 1 April 1999 (see the as-set version for the 1961 rule).

Let-out property

For a let-out house, the interest payable for the year and the pre-construction instalment are deducted in full; there is no ceiling. The resulting loss, however, can be set off against other heads only up to ₹2,00,000 in a year (section 109(1)(b)); under the optional regime the rest is carried forward against house property income for at most the eight tax years that follow the tax year in which the loss was first computed (section 110(1)-(2)). Under the default regime the loss cannot be set off against other heads at all (section 202(2)(b)(ii)), and it is not carried forward either: section 202(3) treats such a loss as given full effect.

Pre-construction period interest (section 22(1)(c))

Interest for the period before the tax year in which the house is acquired or construction is completed (from the date of borrowing up to the end of the preceding tax year) is not allowed in the year it accrues. It is added up and deducted in five equal instalments, beginning with the tax year in which the acquisition or construction is completed. Any part of it already allowed under another provision is excluded first (section 22(3)).

Old regime and new regime compared

Illustration (our own)

A loan of ₹40,00,000 was taken on 1 June of a tax year; construction was completed in the third tax year after that. Interest for the earlier period up to the end of the year before completion is ₹6,00,000, and the current year's interest ₹3,60,000. The pre-construction instalment is ₹6,00,000 ÷ 5 = ₹1,20,000 for each of five years.

• Self-occupied, old regime: current interest ₹3,60,000 plus the instalment ₹1,20,000 = ₹4,80,000, limited to ₹2,00,000 (completed within five years; lender's certificate furnished).
• Self-occupied, new regime: the instalment ₹1,20,000 only, and the resulting loss cannot be set off against other heads (section 202(2)(b)(ii)).
• Let out, either regime: ₹4,80,000 in full; in the old regime a resulting loss is set off against other heads up to ₹2,00,000 (the rest carried forward), in the new regime not at all, nor carried forward (section 202(3)).