Self-Construction Home Loan Explained: Loan Rules, EMI Timing and Tax Benefits You Must Know Before Building a Home
Owning a house has always been one of the most important life goals for Indian families. The popular saying “food, clothing and shelter” reflects how deeply a home is linked to security and stability. While earlier many people waited until retirement to build their own house, easy access to home loans has now made self-construction possible even at a younger age. However, building a house on your own plot is not just an emotional decision, it is also one of the biggest financial commitments of your life.
If you are planning to construct a house on your own land, understanding home loan rules, EMI structure and tax benefits in advance is extremely important. Proper planning can help you avoid tax losses and financial mistakes later. Here is a detailed explanation of how self-construction home loans work and what tax benefits are available.
Home Loan for Self-Construction: How Is It Different?
Taking a home loan for a ready-to-move or under-construction property is relatively simple because most banks and housing finance companies follow standard lending rules. Loan tenure, interest rates and eligibility criteria are usually similar. In under-construction properties, the loan amount is released in stages based on construction progress.
However, when it comes to building a house on your own plot, the options become slightly limited. In such cases, lenders usually offer a composite loan, which includes both the cost of the plot and the construction cost. The lender first ensures that the borrower has invested their share, known as margin money, before disbursing the loan amount.
The loan is released in phases, depending on different stages of construction. To receive each instalment, the borrower may need to submit certificates from an architect or civil engineer along with photographs of the construction site. In some cases, banks may also send their own technical experts to inspect the site before releasing funds.
When Does EMI Start for a Self-Construction Loan?
A common misconception is that EMI starts only after the house is fully constructed. In reality, full EMI usually begins once the entire loan amount is disbursed, which typically happens near completion of construction.
However, during the construction phase, borrowers are required to pay interest on the amount already disbursed by the bank. This interest is known as pre-EMI interest. Even though your full EMI may not have started, interest payments can begin much earlier, which should be factored into your financial planning.
Tax Benefits on Self-Construction Home Loan
Tax benefits on a self-construction home loan are mainly available under Section 80C and Section 24(b) of the Income Tax Act. Understanding the conditions attached to these sections is crucial.
Section 80C: Deduction on Principal Repayment
Under Section 80C, repayment of the principal portion of a home loan qualifies for a deduction of up to ₹1.5 lakh per financial year. This limit is shared with other investments such as PF, PPF, ELSS, ULIP and NSC.
An important point to note is that principal repayments made before the completion of construction do not qualify for any tax deduction. This benefit is available only after the house is fully constructed and only under the old tax regime. If you sell the house within five years of completion, all deductions claimed under Section 80C will be added back to your income in the year of sale.
Section 24(b): Tax Benefit on Interest Paid
Tax deduction on home loan interest is available under Section 24(b). This benefit can be claimed only from the year in which construction is completed. The interest paid during the construction period, including pre-EMI interest, can be claimed in five equal instalments over the next five years after completion.
For a self-occupied property, the maximum interest deduction allowed under the old tax regime is ₹2 lakh per year. However, if construction is not completed within five years from the end of the financial year in which the loan was taken, this limit is reduced to ₹30,000 per year. Under the new tax regime, no interest deduction is available for self-occupied property.
What If the Constructed House Is Rented Out?
If the house is let out, the entire interest paid on the home loan can be claimed as a deduction. However, under the old tax regime, loss from house property that can be set off against other income is capped at ₹2 lakh per year. Any remaining loss can be carried forward.
Under the new tax regime, loss from house property cannot be set off against other income. This means the interest deduction is limited only to the rental income earned from the property.
One important relief is that interest deduction claimed under Section 24(b) does not need to be reversed if the property is sold within five years of completion.
Final Thoughts
Building a house on your own plot can be financially rewarding, but it requires careful planning. Understanding how loan disbursement works, when EMI starts and how tax benefits apply can save you from unpleasant surprises. Choosing the right tax regime and keeping track of construction timelines plays a key role in maximising benefits.
A self-construction home loan is not just about financing a dream home, it is about managing long-term financial health wisely.
Disclaimer: This article is for informational purposes only and does not constitute tax or investment advice. Tax laws may change. Readers are advised to consult a qualified tax or financial advisor before making financial decisions.
