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has amended Section 22(2) to clearly state that prior-period interest (before possession) payable is now part of the total deduction for interest on home loan. This change aligns the new Income Tax Act with the old Income Tax Act. The maximum tax deduction for home loan interest for self-occupied houses is still Rs 2 lakh. This tax deduction for self-occupied house property is only available in the old tax regime.
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According to the Section 22(2) of the Income-tax Act, 2025, you can deduct interest on borrowed capital when calculating income from a self-occupied house property, but there’s a limit of Rs 2 lakh, if the property is bought or built with borrowed money.
Previously, the wording of Section 22(2) did not clarify if this Rs 2 lakh ceiling included interest from the pre-possession period, that is interest accruing before the possession of property is given.
This created ambiguity and a potentially moving away from the long-settled position under the Income-tax Act, 1961. To fix this, Budget 2026 has proposed a corrective amendment to Section 22(2) to make it clear that the total deduction of Rs 2 lakh covers both:
- Current-year interest, and
- Prior-period (pre-possession ) interest payable.
This amendment aligns Section 22(2) of the Income Tax Act, 2025 with Section 24(b) of the Income Tax Act, 1961.
Taxmann research points out that under the Income Tax Act, 1961, the overall ceiling of Rs 2 lakh for self-occupied property clearly included both current-year interest and prior-period interest (allowed in five equal installments). The absence of an explicit provision in the Income Tax Act, 2025, had created an unintended deviation from the settled position under the earlier law.
How does this amendment in new Income Tax Act, 2025 help
According to Taxmann research, the amendment in the new Income Tax Act, 2025, removes any uncertainty over interpretation, and ensures that the overall interest deduction on a self-occupied house property, whether current or prior-period, is limited to Rs 2 lakh, thereby providing clarity and certainty for taxpayers.
Chartered Accountant Suresh Surana said to ET Wealth Online that current-year interest refers to the interest payable on the home loan for the relevant tax year, after the property has been acquired or possession has been completed.
Surana says that prior-period (pre-possesion) interest refers to the interest that builds up from the date of borrowing until the end of the tax year immediately preceding the year in which construction wraps up.
Such prior-period interest is deductable in five equal annual installments, starting from the year in which the property is completed.
Surana says that the amendment clarifies that both these components together cannot exceed Rs 2 lakh in any tax year for a self-occupied property.
According to Surana, from a tax compliance perspective, this amendment provides clarity as:
- It does not reduce an existing benefit that was available under the 1961 Act.
- However, it prevents an unintended interpretation under the ITA 2025 that could have allowed prior-period interest over and above the Rs. 2 lakh cap.
- It removes interpretational disputes, ensuring that taxpayers, employers, and tax authorities follow a uniform and predictable rule.
Surana says that for the majority of the home-loan taxpayers, the actual tax result remains the same as it was under the earlier law. However, taxpayers with large pre-possession interest should be aware that the total interest deduction for a self-occupied property, which includes both current and past periods, will still be limited to Rs 2 lakh annually.
Budget 2026 announcement
Section 22 of the Act deals with deductions in the case of income from house property. Further, section 22(2) provides that, the aggregate amount of deduction in the case of self-occupied property shall not exceed Rs 2 lakh where property is acquired or constructed with borrowed capital.
However, this ceiling of Rs 2 lakh has not included the deduction of prior-period interest payable for the acquisition or construction of property. It is pertinent to mention that section 22 of the Act corresponds to section 24 of the Income-tax Act, 1961. In the Income-tax Act, 1961, aggregate amount of deduction for the interest on the borrowed capital was inclusive of prior period interest payable.
In this regard, it is proposed to amend section 22(2) of the Act so as to provide that aggregate amount of deduction for interest on borrowed capital shall be inclusive of priorperiod interest payable.
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