Pre-construction Interest

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CA Ysil Karunai (Querist)
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11 September 2010 Dear Sir,
Please calculate the pre-construction interest from the following information:

Mr. X had constructed a residential house in chennai in february 2006 for Rs. 30 lakhs. Part of the costs of construction was met by borrowals from the Housing Development corporation, at interest of 12.5% p.a. The loan was taken on june 2004. The loan outstanding at the beginning of the current year was Rs. 16,00,000/-. The rate of interest applicable for the current year was reduced to 9% p.a. due to reduction in rates by almost all competitive banks. He has also borrowed from some relatives Rs. 4,00,000/- on which interest at 15% p.a. was due. The property had been let out soon after completion.

CMA. Dinesh S Adhikari, ACMA

CMA. Dinesh S Adhikari, ACMA (Expert)
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11 September 2010 Dear Sir,
Here What does mean of current year?? I assueme that it is for 2009-10.

Now, pre-construction period of your house is from June 2004 to Feb'2006, i.e., 1 years and 9 months.
Interst for the same period will be:

= 16,00,000*12.5/100*21/12 = 358400.

Now, Pre-construction interest will be Rs. 3,58,400 and this can be claim in five equal installments, therefore first installment will be start from the year 2006-07 and last year of claiming pre-construction interest will be 2010-11.

= 3,58,400/5 = Rs. 71,680.

Assumtions:
1) Assumed that only Rs. 16,00,000 will be taken from bank at 12.5%
2)Starting date of loan is 1st-june-2004 and completion of construction date is 28-feb-2006.
3) Loan from relative is not included in above computation, however, if that has same period then Pre-construction interest rate will also be computed on that amount as per above computation @15% and this will also be eligible for 5 installments.
4) Post-construction period is not included in above computation.

Regards!!!
Dinesh S. Adhikari

CA Ysil Karunai

CA Ysil Karunai (Querist)
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12 September 2010 Dear Sir,
Please read the last line of question, "The property had been let out soon after completion", so, the construction of the property was not completed. Why need to assume the fact.
Please clarify!!!