Budget 2026–27 Update: Home Loan Interest Deduction Set to Include Pre-Construction Interest

The Union Budget 2026–27 has brought relief for home loan borrowers. Until now, taxpayers could claim a deduction of up to ₹2 lakh per year on interest paid on a home loan for a self-occupied property, but only for interest paid after the property’s acquisition or construction. 

The new proposal will allow inclusion of prior-period interest, meaning interest accrued before possession or completion of a property will also count towards the ₹2 lakh limit. This change has been proposed under Section 22(2) of the new Income Tax Act, 2025, which corresponds to the earlier Section 24 of the Income-tax Act, 1961 that governed house property deductions.

This shift is effective from April 1, 2026, aligning relief measures with the revised tax law and aiming to reduce the cost burden on borrowers of under-construction homes.

What the Deduction Change Really Means

For years, borrowers of under-construction homes faced a gap: during the period before property completion, interest continued to accumulate on the loan, but much of it could not be claimed until possession. Under the old tax regime (Income-tax Act, 1961), this pre-construction interest was included in deductions spread over several years. The new proposal restores this benefit under Section 22, ensuring the maximum ₹2 lakh deduction need not exclude those early interest costs.

This can lower taxable income in crucial early years of loan repayment, particularly for younger families buying homes off-plan or in cities with long construction cycles. In practical terms, a borrower who started paying interest two or three years before possession could now factor much of that cost into their annual tax relief up to the ₹2 lakh cap.

Current Tax Benefits for Home Loan Borrowers

Home loan tax relief in India includes multiple provisions, and this proposed change sits alongside a broader set of deductions:

This table shows the main components of tax relief on home loans that many borrowers use. Sections like 80EEA apply only to first-time buyers of affordable homes who meet specified criteria, such as property valuation limits and loan sanction dates.

After the table: The inclusion of prior-period interest makes the ₹2 lakh deduction under Section 22 more meaningful for buyers of units still under construction, aligning benefits with the reality that most interest costs are front-loaded in long-tenure loans.

Why This Change Matters for Borrowers

In recent years, property prices and interest rates have risen significantly, leading to higher interest components in EMI payments, especially during the early stages of the loan. Borrowers often felt that the ₹2 lakh limit was inadequate since a large portion of interest paid before possession could not be claimed. Allowing this earlier interest to count helps lower the effective tax outgo for many middle-income families.

Industry bodies had long sought enhanced tax breaks on home loans, with calls to raise the interest deduction ceiling or expand it to cover more scenarios. Though the ₹2 lakh limit remains unchanged, bringing pre-construction interest within its scope is a meaningful step in easing the financial burden.

This amendment also brings clarity as the tax code transitions from the 1961 Act to the new 2025 Act, reassuring borrowers that benefits they previously claimed will continue in an updated form.

Final Thoughts

The FY27 budget proposal to include prior-period interest in the home loan interest deduction simplifies tax planning for borrowers, particularly those investing in properties that take years to complete. While the overall cap stays the same, this change boosts the value of the deduction by widening the pool of eligible interest. It is a welcome tweak for anyone navigating the long road from loan sanction to home ownership. The true impact will be visible when taxpayers file returns after April 1, 2026, but for now, home buyers can look forward to greater tax clarity and relief under the new regime.