Sometimes the whole money for the house is not disbursed to the builders. For example, if you are booking an apartment to a builders in Bangalore city on March 2009, the estimated completion time for the project is March 2011. You will have the option to tell the bank to not disburse the entire amount before completion of the project, and tell them to partially disburse the money.
The partial disbursement will happen like when the builder completes the first four floors for the first disbursement and the next stage of disbursement will happen after completion of the eight floors. These are the agreements between bank and builders based on bank’s decision.
Here the pre-EMI term comes into the play. The real loan repayment will start only when the entire loan amount is disbursed to the builders. While the bank is doing the partial disbursement, you will have to pay the pre-EMI, that is only the interest accrued on the disbursed money. In our example, you will have to pay the pre-EMI for the two years when the apartment is under construction.
Tax Savings on pre-EMI
You can use the home loans for tax savings only when the construction is completed. In this case, pre-EMI is paid while the house is under construction. So, you cannot use the pre-EMI as the tax deduction source. Once the construction is completed, the total pre-EMI interest paid is shown in the five equal installments in the subsequent years.
For example, if you have paid Rs.100000 as the pre-EMI, then Rs.20000 will be shown in the next five years as tax deduction. Note that pre-EMI is only the interest paid during the period. If you have paid any principal amount, that is not eligible for the tax deduction. That is lost for ever. Please consult your tax consultant carefully before taking any important decision.
Summary
In this article have explained about what is EMI and pre-EMI in the detailed manner. This will clear all your doubts about the pre-EMI and how to use the pre-EMI amount for the tax deduction. I am happy to answer all your questions regarding the home loans and tax savings. If you have any queries, please post it in the comments section below. I will answer your queries. Thanks for reading this article!!!
Pre-EMI interest can be claimed in 5 equal instalments AFTER the construction of the house ends. That is, it can be claimed in 5 equal instalments after your actual EMI starts. (This is under section 24).
Thus, if your EMI has not started yet, you would not be able to claim the pre-EMI interest.
As I have mentioned, once your full EMI starts, please claim the total pre-EMI interest paid by you over the years in 5 equal instalments over the next 5 years.
For example, if you pay Rs. 20,000, Rs. 30,000 and Rs. 30,000 as pre-EMI interests in years 2003-04, 04-05 and 05-06 respectively.
Now, say your EMI starts in 2006-07. Then, you can claim Rs. 16,000 (A fifth - or 20% - of Rs. 80,000, which is the total pre-EMI interest paid by you) per year from 2006-07 to 2010-11.
There is no need to indicate the pre-EMI interest in the income tax return (ITR) form for the years in which you are paying this pre-EMI interest.
Once the construction of the house is completed, and your EMIs start, you need to claim 20% of the total pre-EMI interest paid, every year for 5 years.
For this, you just need to add this pre-EMI interest to the interest component of your EMI that you are claiming.
This would come in the field "interest payable on borrowed capital". This would be in Schedule HP, field 1g on Page 3 of ITR2.
For example, let's say your total pre-EMI interest is Rs. 80,000, and your interest component of EMIs for this year is Rs. 50,000.
So, in the "interest payable on borrowed capital" field, instead of putting Rs. 50,000, you should put Rs. 66,000 (Rs. 50,000 + Rs. 16,000 which is 1/5th of your total pre-EMI interest of Rs. 80,000)
