30. The assessee is a naval officer, he is. planning to take 2 housing loans of Rs 20,00,000. The assessee seeks your advice if he gets the possession of property of the house only after one year. But he starts paying interest, will he get an income tax rebate? Advice properly.

1. Facts of the Case

• The assessee is a naval officer planning to take two housing loans, each amounting to ₹20,00,000 (total ₹40,00,000).
• The properties are under construction, and the possession is expected to be received after one year.
• The assessee will start paying interest on the loan immediately.
• He seeks professional advice on whether income tax deductions can be claimed for the interest paid before possession.

2. Issues in the Case [Questions]

1. Can the interest paid before possession of the house property be claimed as a deduction under the Income Tax Act?
2. Is there any timing restriction on claiming such deduction?
3. How is pre-construction interest treated under the Act?
4. Can the assessee claim full interest deduction for both loans after possession?

3. Legal Principles Covered

A. Section 24(b) – Deduction on Interest for House Loan

• Section 24(b) of the Income Tax Act allows deduction of:
  • Up to ₹2,00,000 on interest for a self-occupied property.
  • Full interest if the property is let out.
• However, deduction is allowed only from the year in which construction is completed or possession is received.

Interest paid before possession is called “pre-construction interest”.

B. Pre-Construction Interest – Rule of Apportionment

As per Explanation to Section 24(b):

• The interest paid before possession (called pre-construction period) is not deductible immediately.
• It is allowed as a deduction in five equal installments, starting from the year of possession/completion of construction.

Formula:

Pre-construction Interest Deduction = Total pre-possession interest ÷ 5
Claim 1/5th every year for 5 years, starting from the year in which construction is completed.

C. Interest on Two Loans

• If the assessee has two separate home loans, he can claim:
  • Separate deductions for both, subject to limits.
  • The aggregate cap for self-occupied homes remains ₹2,00,000.
  • If either or both homes are let out, entire interest (including pre-construction interest) can be claimed without any upper limit.

Ensure both loans are from recognized financial institutions or banks.

D. Relevant Case Laws / CBDT Clarification

1. CIT v. Rajiv Shukla (Delhi HC): Held that pre-construction interest is deductible in 5 equal parts after completion of construction.
2. CBDT Circular No. 363: Reaffirms that deduction for pre-construction interest is allowed only after construction is complete.

4. Possible Judgement / Advisory

Based on the legal provisions:

• The assessee cannot claim deduction for interest paid before the possession year in the year of payment.
• However, he is entitled to claim the pre-construction interest in 5 equal installments, starting from the financial year in which possession is received.
• If both properties are self-occupied, the total deduction under Section 24(b) is limited to ₹2,00,000 in aggregate.
• If any of the properties is let out, full interest deduction (including pre-construction interest) is allowed for that property.