50. The Assessee purchased a flat in July 2013 on a loan and started paying EMI from the date of receipt of the loan. The assessee will receive the possession of the house in August 2014, whether the interest benefit will be available for the to the assesse assessment year 2014-2015 (F.Y.2013-2014)? If ‘Yes’ why and if “Not, why? Explain.

1. Facts of the Case

• The assessee purchased a residential flat in July 2013, during the Financial Year 2013–2014.
• The purchase was made through a home loan, and the assessee began paying EMIs (principal + interest) immediately after receiving the loan disbursement in FY 2013–14.
• Possession of the house was obtained later, in August 2014 (i.e., in FY 2014–15).
• The assessee wishes to know whether the interest paid during FY 2013–14 (prior to possession) is eligible for deduction in Assessment Year 2014–15.

2. Issues in the Case [Questions]

1. Can interest on housing loan paid before possession of a house be claimed as a deduction in the year of payment?
2. Does the Income Tax Act, 1961 permit such a claim for the pre-construction period?
3. How and when can the pre-possession interest be claimed by the assessee?

3. Legal Principles Covered

A. Section 24(b) of the Income Tax Act, 1961

• This section allows deduction of interest on borrowed capital for purchase, construction, repair, renewal or reconstruction of a property.
• The deduction is subject to a maximum limit of:
  • ₹2,00,000 for a self-occupied house (if loan is taken after 01.04.1999),
  • Full interest allowed for let-out property (no upper limit).

B. Treatment of Pre-Construction Interest

• The Act distinguishes between:
  • Pre-construction period: From the date of borrowing the loan till 31st March immediately before the year of completion/possession.
  • Post-construction period: From the date of possession/completion onward.
• As per Section 24(b) and related provisions: Interest for the pre-construction period shall be allowed in five equal instalments beginning from the year in which the construction is completed or the property is acquired.

C. CBDT Clarification

• CBDT Circular No. 363 and judicial pronouncements reaffirm that no interest deduction is permitted prior to possession under Section 24(b).
• However, pre-construction interest can be accumulated and claimed in five equal installments starting from the year in which possession is obtained.

4. Possible Judgement

Based on the above legal framework:

• The interest paid during FY 2013–14 (AY 2014–15) cannot be claimed in that assessment year, since possession was not received in that financial year.
• However, this interest will be considered as “pre-construction interest”, and is eligible to be claimed in five equal installments starting from the year of possession, i.e., AY 2015–16 (FY 2014–15).
• Thus, the assessee can begin claiming 1/5th of the total pre-possession interest from the assessment year following possession, and for the next 4 years thereafter.