Can a member claim pre-construction interest on a loan taken for extra area in a redevelopment?

If the loan is used to acquire or construct the flat, interest for the period before the year of acquisition or construction is deductible in five equal instalments from that year, under the Explanation to section 24(b) and section 22(1)(c) of the 2025 Act. Which year that is for a redevelopment flat has not been decided, so the agreement, the possession letter and the completion certificate should all be kept on file.

Is repayment of the principal of a home loan deductible under section 24(b)?

No. Principal repaid on a housing loan from a listed lender, instalments paid to a co-operative society of which the assessee is a member towards the cost of the house allotted to him, and stamp duty and registration on transfer of the house to the assessee fall under section 80C(2)(xviii), within the one lakh fifty thousand rupee aggregate; the 2025 Act carries this in section 123 with Schedule XV. Neither deduction is available to a member taxed under the regime in section 115BAC, which applies by default from assessment year 2024-25 unless he opts out under sub-section (6): section 115BAC(2)(i) computes income without the section 24(b) deduction for a self-occupied or nil-value house and without section 80C, and section 202(2) of the 2025 Act does the same for section 22(1)(b) and section 123. Interest on a let-out house remains deductible in that regime, but a resulting loss cannot be set off against another head.

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s.24(b) — Interest on borrowed capital for house property

Q: What happens to the two lakh rupee cap if the redevelopment overruns?

For a house whose annual value is nil under section 23(2), the cap is two lakh rupees only where the acquisition or construction is completed within five years from the end of the financial year in which the capital was borrowed; otherwise it is thirty thousand rupees. A loan taken during a redevelopment that overruns five years is exposed. Section 22(2) of the 2025 Act keeps the same rule.

Interest on capital borrowed to acquire, construct, repair, renew or reconstruct a house is deductible against its income, with pre-construction interest spread over five years and a cap for a self-occupied house.

Currently operative

Section 23(2), which fixes the property to which the caps apply, was substituted by the Finance Act, 2025 (Act No. 7 of 2025) with effect from 1 April 2025, that is, from assessment year 2025-26. The counterpart in the Income-tax Act, 2025 is section 22: sub-section (1)(b) and (c) for the deduction and pre-construction interest, sub-section (2) for the caps, sub-sections (3) to (5) for the reduction, the lender's certificate and the aggregate limit, and sub-section (6) for interest payable outside India.

Income-tax Act, 1961

s.24(b)

Income-tax Act, 2025

s.22(1)(b), (c), (2) to (6)

In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.

In short

Section 24(b) of the Income-tax Act, 1961 allows, in computing income from house property, the amount of any interest payable on borrowed capital where the property has been acquired, constructed, repaired, renewed or reconstructed with it. For property referred to in section 23(2), the first proviso caps the deduction at thirty thousand rupees. The second proviso raises the cap to two lakh rupees where the property is acquired or constructed with capital borrowed on or after 1 April 1999 and the acquisition or construction is completed within five years from the end of the financial year in which the capital was borrowed; reconstruction is not mentioned, so a loan used only to repair, renew or reconstruct stays at thirty thousand rupees. A further proviso makes the higher cap conditional on a certificate from the lender specifying the interest payable, including on a new loan taken to repay the original capital, and the last proviso caps the aggregate under the first two provisos at two lakh rupees. Under the Explanation, interest for the period before the previous year in which the property is acquired or constructed, reduced by any part allowed under another provision, is deducted in five equal instalments beginning with that year. From assessment year 2025-26 section 23(2) gives a nil annual value where the owner occupies the house for his own residence or cannot actually occupy it due to any reason; for earlier years the non-occupation limb reached only an owner who had to reside elsewhere because of employment, business or profession. Section 25 denies the deduction for interest payable outside India on which tax has not been paid or deducted and for which no person in India can be treated as agent. Principal repayment is outside this clause and falls under section 80C(2)(xviii). The counterpart in the Income-tax Act, 2025 is section 22: sub-section (1)(b) for the interest, sub-section (1)(c) for pre-construction interest in five equal instalments, sub-section (2) for the caps, the five-year completion condition now running from the end of the tax year of borrowing, sub-sections (3) to (5) for the reduction, the certificate and the aggregate limit, and sub-section (6) for interest payable outside India. The nil annual value rule is section 21(6).

What the provision does

Allows interest on money borrowed for a house against the income of that house, spreads pre-construction interest over five years, and caps the deduction where the house is self-occupied or cannot be occupied. It does not allow principal, which belongs to section 80C; it does not give the two lakh rupee cap for property only repaired, renewed or reconstructed with the loan, or where acquisition or construction overruns five years; it is not available for a self-occupied or nil-value house under the default regime in section 115BAC; and it does not say whether a member whose building a developer rebuilds has acquired, constructed or reconstructed anything.

Threshold questions

Was the capital borrowed and used to acquire or construct this property, which can earn the two lakh rupee cap, or only to repair, renew or reconstruct it, which cannot
Is the annual value nil under section 23(2) because the owner occupies the house or cannot actually occupy it, so that a cap applies
Was the acquisition or construction completed within five years from the end of the financial year in which the capital was borrowed
In which previous year was the property acquired or constructed, the year that starts the five pre-construction instalments
Has the lender's certificate of the interest payable been obtained
Is any interest payable outside India without tax paid or deducted, which section 25 disallows
Is the assessee taxed under the default regime in section 115BAC (section 202 of the 2025 Act), which disallows the deduction for a self-occupied or nil-value house

In practice

The recurring disputes.

Interest on the old flat's loan while the building is down

A member who borrowed to buy the old flat keeps paying interest after the building is demolished. The member's argument is that clause (b) expressly covers property reconstructed with borrowed capital, that from assessment year 2025-26 a house the owner cannot actually occupy due to any reason has a nil annual value under section 23(2), so a cap applies rather than a denial, and that the Mumbai Tribunal in Rajesh Shamji Furia (July 2026), in a holding-period context, treated the member's ownership as continuing through redevelopment and merely substituted from the old structure to the new. But the cap is thirty thousand rupees, because the two lakh rupee limit in the second proviso is confined to property acquired or constructed with the borrowed capital and does not mention reconstruction, so the continuation view that saves the deduction also keeps it at the lower figure. The Revenue's argument is that once the structure is demolished there is no house whose income can be computed, that the developer rebuilds at its own cost and the member reconstructs nothing with the loan, and that for earlier years section 23(2) did not describe a demolished flat at all. The Revenue can add section 23(3)(b), section 21(7) of the 2025 Act, which takes away the nil value where any other benefit from the house is derived by the owner, and say that transit rent is such a benefit; the member's answer is that the developer pays for his displacement, not out of the house, which no longer exists; no order has yet tested either side.

When a redevelopment flat is acquired or constructed

The Explanation starts the five instalments of pre-construction interest in the year of acquisition or construction, and the two lakh rupee cap depends on completion within five years. For a member who borrows to buy extra area, the candidates are the development agreement, the permanent alternate accommodation agreement, possession and the completion certificate. In Furia the Tribunal held, for the holding period, that the permanent alternate accommodation agreement neither creates ownership nor marks acquisition of a fresh asset; in Snehalata Heramb Dhayagude and Manoj Devshi Chhadva it held, for section 56(2)(x), that nothing is received until a habitable flat is handed over. The member will rely on the date that suits each purpose, and the Revenue will insist on one date for all. No order under section 24(b) has yet fixed the date for a redevelopment flat.

The five-year condition in a delayed project

Where the loan financed an old flat acquired long ago, the member's argument is that acquisition was completed when the old flat was bought, the second proviso was satisfied then, and reconstruction by a developer does not start a new clock. The Revenue's argument is that interest paid after demolition is interest on capital for a house that is being constructed again. The member who says the old acquisition is what counts must also face the words of the second proviso: it speaks of property acquired or constructed with the borrowed capital, and a loan that financed the old flat financed an acquisition long completed, while the rebuilding is reconstruction, which the proviso does not mention. For a loan taken during redevelopment the risk is plainer: if the new flat is not complete within five years from the end of the year of borrowing, the cap for a self-occupied flat falls to thirty thousand rupees, and many society projects overrun. Section 22(2) of the 2025 Act repeats the condition, measured from the end of the tax year of borrowing. Neither argument has been tested in an order found.

Displacement receipts treated as house property

Some Assessing Officers have taxed a member's displacement receipts as income from house property, which would put the interest deduction against them. In Rajnikant D. Shroff (September 2016) the Assessing Officer first taxed a lump sum as house property without any deduction under section 24 and then called it income from other sources; the Mumbai Tribunal held it a capital receipt, while directing that it be reduced from cost under section 51 on a later sale. In Ajay Parasmal Kothari (April 2023) the member's alternative plea was house property with the thirty per cent deduction under section 24(a), and in Farida Zulfikar Lokhandwala (March 2024) a tenant offered twelve months' rent as house property to avoid litigation; in both the receipts were held capital. The Bombay High Court in Sarfaraz S. Furniturewalla (Writ Petition 4958 of 2024, 15 April 2024), a private civil writ to which the Department was not a party, held that transit rent is not rent for section 194-I. On the prevailing view the receipt is not house property income, and interest on the member's loan is claimed against the flat itself, within the cap.