Deduction under section 24 for Interest paid to first financer

Great question! Here’s the clarity on Section 24(b) deduction for interest on housing loan in this scenario:

Scenario Recap:

• Client took home loan from Financer A initially.

• After 2 years, repaid Financer A by taking a loan from Financer B.

• Construction completes after that.

Can interest paid to Financer A (the first financer) be claimed as deduction?

Yes, but with conditions:

1. Interest on loan taken before completion of construction (Pre-Construction Interest or Pre-EMI interest) can be claimed as deduction in 5 equal installments starting from the year the construction is completed.

2. Interest paid to the first financer (Financer A) before repayment is eligible for deduction** as pre-construction interest, provided:

   • The first loan was utilized for purchase/construction of the house property.

   • Interest was actually paid to Financer A during the construction period.

   • The loan from Financer B is essentially a balance transfer/refinancing (not for any other purpose).

3. So, pre-construction interest paid to Financer A is allowed to be claimed under section 24(b) in the year construction completes, and then spread over 5 years.

4. After construction completes, the interest paid to Financer B can be claimed fully in that year under section 24(b) (subject to overall limits).

Important:

• Keep proof of interest paid to Financer A.

• Ensure loans are traceable to the same property and the loan from Financer B was taken to repay Financer A.