The Union Budget 2026–27 has removed a key area of uncertainty for India’s middle-income homebuyers by confirming that interest paid on home loans during the construction phase will continue to qualify for tax deduction on self-occupied homes. The clarification, embedded within amendments to the new Income Tax Act, provides continuity for borrowers who commit to housing projects years before taking possession.
The provision addresses confusion triggered by the transition to the Income Tax Act, 2025, scheduled to take effect from April 1, 2026. Under the revised framework, the annual deduction limit of Rs 2 lakh on home loan interest remains unchanged, but the government has now explicitly stated that this cap includes interest paid during the pre-construction period as well as interest accrued after possession. For urban households, particularly those purchasing under-construction apartments in expanding cities, the clarification is significant. Construction timelines in Indian cities often stretch over several years, during which buyers continue servicing interest on housing loans without occupying the property. Tax experts say that without this clarification, borrowers risked losing a long-standing benefit that helped offset rising housing and financing costs. The amendment aligns the new tax law with the intent of earlier legislation, under which pre-construction interest was eligible for deduction after possession, spread across subsequent years but subject to the same overall ceiling. By retaining this structure, policymakers have avoided penalising buyers who opt for phased construction projects a dominant model in India’s urban housing supply.
Urban economists note that the move reinforces the government’s emphasis on owner-occupied housing rather than speculative investment. At a time when affordability pressures are intensifying due to higher land prices, construction costs and stricter environmental compliance, predictable tax treatment becomes an important factor in household financial planning. The Budget also draws a clearer line between housing-led tax relief and investment-driven borrowing. Interest deductions on loans taken to earn income from dividends or mutual funds have been withdrawn, signalling a policy shift that prioritises residential stability over leveraged financial investments. This distinction is expected to influence how households allocate debt in the coming years. From a city-planning perspective, sustained support for self-occupied housing can contribute to more stable neighbourhoods and long-term residency, reducing speculative churn in housing markets. Planners argue that such measures, while fiscal in nature, have downstream impacts on urban infrastructure demand, transport usage and community development.
All amendments will come into force alongside the new tax regime in the next financial year. For now, homebuyers and lenders alike have greater certainty that the core tax benefit linked to housing loans remains intact, offering a measure of financial predictability in an increasingly complex urban housing environment.
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Union Budget 2026 reassures self occupied homeowners
