Tax Benefits on Pre-EMI

When you take loan-seeking financial assistance, you will be required to pay the principal loan amount along with the interest amount. EMI stands for Equated Monthly Installments, and it has to be paid monthly until the tenure is completed. For instance, if you have taken a home loan, then you will be required to pay the amount regularly along with interest. The amount paid in the form of EMI has two components, the principal amount and the amount of interest paid.

The total amount to be paid is calculated in a way that the amount paid each month remains the same. The EMI is initiated after the financial institution has disbursed the loan. The factors that affect the amount that is required to be paid in the form of EMI are; the loan amount, loan tenure, interest rate applicable to it, etc. The EMI is lower for longer tenures and for a shorter tenure the EMI paid is relatively high. In the starting period, the amount paid in the form of principal is higher than the interest amount, and towards the end of the tenure, the interest paid is higher than the principal amount.

Taxes During Pre-EMIs

Only after the construction of a building is finished, the tax deductions on Pre-EMI can be availed. The total pre-EMI paid is deductible in the form of 5 installments after the construction is completed. The principal amount paid on Pre-EMI is not eligible for tax deductions; only the interest amount paid by the borrower is eligible for tax deductions under Section 24. The interest payable over the tenure must be aggregated for the tenure to avail the benefits of tax deduction.

When the owner of a building makes the capital payment before the construction of the building is completed, the loan amount is not eligible for tax deductions, but if the owner makes the payment after completing the construction of the building, the loan amount is eligible for a tax deduction. The upper limit of tax deduction on any form of home loan is 1 lakh.

Pre-EMI Tax Benefit Case Study

To understand the impact of tax benefits on Pre-EMIs paid for a loan, you can check the example described below:

Kritika has taken a loan worth Rs.20 lakh to begin the construction of a property located at Hyderabad in October 2018. While she has been paying an EMI amounting to Rs.18,000 since the disbursement of the loan, the project ended in November 2019, and the property has been leased from December 2019.

In this case, Kritika is eligible for tax deductions for the financial year 2018-19, and she can claim the deduction only in the income tax return that she files for the financial year 2018-19 based on the Section 80C of Income-tax Act, 1961.

Details of interest paid while the property was under construction are described below:

Period	Interest paid
October 2015 to March 2016 (FY 2015-16)	Rs.18,000 X 6 = Rs.1,08,000
April 2016 to March 2017 (FY 2016-17)	Rs.18,000 X 12 = Rs.2,16,000
The total interest paid is Rs.3,24,000

Pre-construction, the EMI for the home loan is applicable for the tenure of 21 October 2017-November 2019. The breakup can be described as:

Tax Benefits Under Income Tax Act, 1961

The tax benefits which can be availed for the interest payable under section 24 and Section 80C of the Income Tax Act.

Deduction amount under Section 24

Completion Status	Self-Occupied Property	Not Self-Occupied Property
Completed in 3 years	Rs.1,50,000	No limit
Completed in more than 3 years	Rs.30,000	No limit

Distinction Between the tax deductions availed under Section 80C and Section 24

Particulars	Section 80C	Section 24
Tax deduction applicable for	Principal	Interest
Tax deduction basis	Paid	Accrual
Total amount of tax deduction applicable	Rs.1.5 lakh	In the case of self-occupied property: Rs. 2,00,000 In case of non- self-occupied property: No limit
Loan offered for	Purchase or construction of a new house property	Construction, reconstruction, repair, renewal or purchase of a residential property
Tax deduction eligibility criteria	Nil	Construction or purchase has to be completed within 3 years
Restriction on the sale of property	Tax deductions claimed are subject to be reversed if the property is sold within 5 years	Nil