Bought an under-construction home? Budget saves your home loan tax benefit

₹2-lakh home loan deduction stays intact under new tax law

If you have taken a home loan for a self-occupied house, the FY27 Budget has brought an important clarification that protects your tax benefit under the new income tax law.

 

The Budget presented by Finance Minister Nirmala Sitharaman on 1 February noted that the ₹2 lakh annual deduction on home loan interest will now also include interest payable for the period before the house is acquired or constructed—commonly known as pre-construction or prior-period interest.

 

What was the concern?

 

Under the new Income Tax Act, 2025, which comes into effect from April 1, 2026, there was ambiguity around whether pre-construction interest would continue to be covered within the ₹2 lakh limit for self-occupied homes.

 

 

Section 22(2) of the new Act allows a deduction of up to ₹2 lakh on interest paid on borrowed capital for a self-occupied property. However, the wording did not explicitly mention prior-period interest, raising fears that borrowers could lose part of the benefit they earlier enjoyed.

 

What the Budget has clarified

 

The government has now proposed to amend Section 22(2) to clearly state that:

 

 The ₹2 lakh cap will include both regular home loan interest and pre-construction interest payable.

 

This aligns the new tax law with the earlier Income-tax Act, 1961, where pre-construction interest was allowed to be claimed (in instalments) within the overall deduction limit.  "This amendment seeks to bring the total benefit of interest on borrowed capital for a self-occupied property at par with what was allowed under the old Income-tax Act, thereby ensuring continuity of this tax relief. It also provides much-needed clarity by explicitly confirming that interest relating to the pre-construction or pre-acquisition period will form part of the overall interest deduction, subject to the existing Rs 2 lakh limit," explained Ritika Nayyar, Partner, Singhania & Co.

 

In simple terms

 

• If you bought or built a self-occupied home using a loan
• And you paid interest even before you got possession
• You can still claim that interest within the ₹2 lakh annual limit, just as before

 

The big takeaway

 

This amendment is a relief for middle-class homebuyers, especially those servicing long-term home loans.  

"By allowing prior-period interest on home loans to be included within the ₹2 lakh deduction limit for self-occupied properties, the Budget restores parity with the earlier Section 24 regime under the 1961 Act. This change provides meaningful relief to genuine homebuyers, particularly those facing long construction timelines, and removes an unintended disadvantage that had emerged under the new law.  From April 1, 2026, borrowers will benefit from clearer tax treatment and improved certainty, reinforcing housing as a priority sector in the government’s fiscal policy," said Vipin Upadhyay, Partner, King Stubb & Kasiva, Advocates and Attorneys.