Example to understand how to claim pre-construction interest. –
Prakash took a loan of Rs.20 lakhs to start construction of his house property in Bhubaneshwar in July 2018. He has been paying EMI of Rs.30,000 ever since.The construction was completed in August 2020 and he received a completion certificate. This house has been on rent since September 2020. Prakash is not sure how he can claim a deduction on interest for the home loan in his income tax return,Homeowners can claim the deduction on interest for the home loan only from the year in which the construction of the property is completed. In this case, Prakash can claim it from FY 2020-21.Prakash pays a total EMI of Rs.6,30,000 in total from July 2018 till 31 March 2020. For the FY 2018-19, total EMI payments are Rs.30,000 X 9= 2,70,000, of which Rs 1,80,000 is paid towards principal repayment and Rs 90,000 is paid towards interest. For the FY 2019-20, Rs 2,40,000 goes towards principal repayment and Rs 1,20,000 is paid towards interest. For FY 2020-21, Rs 1,68,000 is paid towards principal repayment and Rs 72,000 is paid towards interest.
|Particulars||FY 2018-19||FY 2019-20||FY 2020-21|
Let’s start with his EMI payments for FY 2020-21: Total interest on home loan is Rs 72,000 for FY 2020-21. Since the property is rented out, he can claim the entire interest as a deduction. Also, prakash can claim a deduction for principal repayment of Rs 1,50,000 (Rs 1,68,000 or Rs 1,50,000, whichever is less) under Section 80C from FY 2020-21.
The period from borrowing money until 31 March immediately preceding the year of completion of construction of the house is called the pre-construction period.The pre-construction interest deduction is allowed for interest payments made from the date of borrowing till March 31st before the financial year in which the construction is completed. Total interest on home loan: Rs 90,000 for FY 2018-19 and Rs 1,20,000 for FY 2019-20, totaling to Rs 2,10,000. Rs 2,10,000 is the pre-construction interest that can be claimed in five equal installments of Rs.42,000 starting from FY 2020-21.
So Prakash can claim Rs.72,000 (interest of FY 2020-21) + Rs.42,000 = Rs.1,14,000 as deduction towards interest from home loan in FY 2020-21. All said and done, one needs to bear in mind that :
The loss from house property that can be set off against other heads of income has been restricted to Rs 2,00,000the benefit of claiming Rs 2 lakhs will get reduced to Rs.30,000 if property is not acquired or construction is incomplete within 5 years from the end of the financial year in which the home loan is availed.
What is the pre-construction period?
Commence Construction means that an owner or operator has either undertaken a continuous program of construction or has entered into a contractual obligation to undertake and complete, within a reasonable time, a continuous program of construction. Commencement of Construction means the commencement of construction of foundation components or elements (such as footings, rafts or piles) for the home.
Cost of Construction means the sum, so far as it relates to the reconstructing, renewing, restoring or replacing of the Improvements, of (i) obligations incurred or assumed by Mortgagor or undertaken by tenants pursuant to the terms of the Leases for labor, materials and other expenses and to contractors, builders and materialmen; (ii) the cost of contract bonds and of insurance of all kinds that may reasonably be deemed by Mortgagor to be necessary during the course of construction; (iii) the expenses incurred or assumed by Mortgagor (or tenant under the Lease performing such Restoration) for test borings, surveys, estimates, permits, any Plans and Specifications and preliminary investigations therefor, and for supervising construction, as well as for the performance of all other duties required by or reasonably necessary for proper construction; (iv) ad valorem property taxes levied upon the Premises during performance of any Restoration; (v) any costs or other charges in connection with obtaining title insurance and counsel opinions that may be required or necessary in connection with a Restoration; and (vi) any costs or other charges in connection with obtaining services (including legal counsel) that may reasonably be deemed by Mortgagor to be necessary in connection with the construction.
Original construction means the first or initial construction of a new building or facility. The term “original construction” shall include the addition of an entire room or floor to any existing building or facility, the completion of any unfinished portion of any existing building or facility and the restoration, reconstruction or replacement of a building, facility or utility structure damaged or destroyed by fire, flood, tornado, lightning, explosion, windstorm, ice loading and attendant winds, terrorism or earthquake, but such term, except with regard to a residence, shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances; Commenced Construction means (a) all of the following site preparation work is completed: ingress and egress routes exist; the site on which the project will be located is cleared and graded; there is power service to the site; footings are prepared; and foundations have been poured consistent with purchased equipment specifications and project design; or (b) the following financial commitments have been made: (i) (A) an engineering, procurement, and construction contract (“EPC”) has been executed by all parties and is effective; or (B) contracts (collectively, “EPC Equivalents”) for all of the following have been executed by all parties and is effective: (1) project engineering, (2) procurement of all major equipment, and (3) construction of the project, and (ii) the cumulative payments made by the developer under the EPC or EPC Equivalents to the counterparties to those respective agreements is equal to at least thirty (30) percent of the total costs of the EPC or EPC Equivalents.
- Completion of Construction means the date, as determined by the Division after consultation with the Recipient, that the work of building and erection of the Project is substantially complete.
- The constructional plant means all appliances, tools, plants or machinery or whatsoever nature required in or about the execution, completion or maintenance of the works but does not include materials or other things intended to form part of the permanent work.
Construction Period means the period commencing on the commencement date and ending on the date of practical completionClause 1.1 Definition of “Corrupt Practice” is added: Start of construction means the first placement of permanent construction of a structure depicted on an approved PRD site plan, such as pouring of slabs or footings, installation of piles, construction of columns, or any work beyond the stage of excavation of a foundation.
Permanent construction does not include land preparation, such as clearing, grading and filling; nor does it include the installation of streets and/or walkways; nor does it include excavation of footings, piers or foundations or the erection of temporary forms. New construction means structures for which the “start of construction” commenced on or after the effective date of the initial floodplain management regulations and includes any subsequent improvements to such structures.
Pipeline Construction means a substantial disturbance to agricultural land associated with installation, replacement, removal, operation or maintenance of a pipeline, but shall not include work performed during an emergency. Emergency means a condition where there is clear and immediate danger to life or health, or essential services, or a potentially significant loss of property.
When the emergency condition ends, pipeline construction will be in accordance with these rules. Begin actual construction means, in general, initiation of physical on-site construction activities on an emissions unit which are of a permanent nature. Such activities include, but are not limited to, installation of building supports and foundations, laying of underground pipework, and construction of permanent storage structures.
With respect to a change in method of operation, this term refers to those on-site activities, other than preparatory activities, which mark the initiation of the change. Existing construction means any structure for which the “start of construction” commenced before the effective date of the initial floodplain management code or ordinance adopted by the community as a basis for that community’s participation in the NFIP.
Contribution in aid of construction, as used in this subrule, means a nonrefundable cash payment grossed-up for the income tax effect of such revenue covering the costs of a distribution main extension or service line that are in excess of costs paid by the utility. The amount of tax shall be reduced by the present value of the tax benefits to be obtained by depreciating the property in determining the tax liability.
Residential construction means construction on single-family or two-family dwellings occupied or used, or intended to be occupied or used, primarily for residential purposes, and includes real property pursuant to chapter 499B. Building construction means any physical activity on the site involved in the erection of a structure, cladding, external finish, formwork, fixture, fitting of service installation and the unloading of plant, machinery, materials or the like.
Land disturbing construction activity means any man-made alteration of the land surface resulting in a change in the topography or existing vegetative or non-vegetative soil cover, that may result in runoff and lead to an increase in soil erosion and movement of sediment into waters of the state. Land disturbing construction activity includes clearing and grubbing, demolition, excavating, pit trench dewatering, filling and grading activities.
Estimated Construction Cost or “ECC” means the amount calculated by Contractor for the total cost of all elements of the Work based on this Agreement available at the time(s) that the ECC is prepared. The ECC shall be based on current market rates with reasonable allowance for overhead, profit and price escalation and shall include and consider, without limitation, all alternates and contingencies, designed and specified by A/E and the cost of labor and materials necessary for installation of Owner furnished equipment.
The ECC shall include all the cost elements included in the AACC, as defined above, and shall represent Contractor’s best current estimate of the Guaranteed Maximum Price it will propose for the Project based on the information then available. The ECC shall not include Contractor’s Pre-Construction Phase Fee, A/E’s Fees, the cost of the land and rights-of-way, or any other costs that are the direct responsibility of Owner.
Direct Construction Cost means the sum of the amounts that the Construction Manager actually and necessarily incurs for General Conditions Costs, Cost of the Work and Construction Manager’s Contingency during the Construction Phase as allowed by this Agreement.
- Direct Construction Cost does not include Pre-Construction Phase Fees or Construction Phase Fees.
- Acquisition and Construction Fund means the fund so designated in, and created pursuant to, Section 502 hereof.
- Erection, construction, remodeling, repairing means all types of work done on a particular building or work at the site thereof in the construction or development of the project, including without limitation, erecting, construction, remodeling, repairing, altering, painting, and decorating, the transporting of materials and supplies to or from the building or work done by the employees of the Contractor, Subcontractor, or Agent thereof, and the manufacturing or furnishing of Construction and Demolition Debris means and includes: Construction Completion Date means five (5) years from the date of this Agreement unless otherwise specified in writing by the Manager, Urban Development; Construction means any physical change or change in the method of operation (including fabrication, erection, installation, demolition, or modification of an emissions unit) which would result in a change in actual emissions.
Construction Phase means that Phase of the Project which shall commence after the Authority provides the Trade Contractor with written Notice to Proceed with the Construction Phase. as constructed plans means as constructed plans as defined in the Building Code;
What are pre-construction services?
What is Pre-construction? – Pre-construction services are preliminary planning and engineering services offered by construction companies before a construction job even begins. This pre-construction planning stage involves defining the project, identifying potential issues, planning and scheduling, the scope, cost estimation, and analysis of the job’s needs.
What is the importance of pre-construction? Quality pre-construction will help a client decide if they can follow through with the construction project. During this pre-construction phase, they may find that the work is either too expensive or not feasible for the space they have. If the contractor and client agree that work is viable, the contractor will then provide the client with a cost and schedule for the construction project.
The pre-construction phase should give the construction team a clear outline to follow during the job and educate the owner/client on what they will need to do to make their project functional and expect it to cost. This process helps the client better understand the project before they even commit to any work being done.
Type of jobLocationScope of project
If the client is unsatisfied with the contractor or isn’t feasible for the client because of cost or constructability, the client can terminate the relationship before construction begins. This is a much better option (and much less costly) than figuring out you aren’t happy with the work being done, aren’t confident with the contractor’s abilities, or realize the project’s scope is too large for the allotted space after construction has begun.
Is pre-construction worth the cost?
How much does pre-construction cost? – Pre-construction costs will depend on the scope of the project, the location, and more but will usually be somewhere in the range of one to three percent of the project’s total cost. Pre-construction’s cost is a separate fee from the construction cost, as it comes before a bid for the actual construction is even in place.
When does the pre-acquisition phase begin?
220.127.116.11 Pre-acquisition phase – The pre-acquisition phase begins when the acquisition or construction of specific property, plant, or equipment is probable, and prior to the acquisition or start of construction. One of the concepts addressed in the proposed PP&E SOP is the differentiation between accounting for costs that are directly identifiable and those that are an allocated or overhead cost.
- The costs are directly identifiable with the specific property.
- The costs would be capitalized if the property were already acquired.
Consistent with this guidance, it is appropriate to capitalize direct costs during the pre-acquisition phase however, overhead and allocated costs should be expensed. Figure 12-5 (included at the end of this chapter) summarizes the accounting for common costs incurred by utilities and power companies during all stages of construction, including the pre-acquisition phase.
Pre-acquisition costs should be reclassified to construction work in progress once construction begins. If construction is no longer probable, the reporting entity should consider whether an impairment loss should be recorded. If the project will be abandoned, the costs should be recorded at the lower of cost or fair value, less cost to sell.
Pre Construction Interest
In such cases, the fair value less cost to sell is likely to be zero.