The Budget 2026 has introduced an important amendment to Section 22(2) of the Income Tax Act, 2025, clarifying the treatment of prior-period interest (interest accruing before the possession of a property) as part of the total deduction for interest on home loans. 

Key Changes:

1. Prior-Period Interest Inclusion:
   The amendment specifically ensures that prior-period interest, which was previously unclear in the context of tax deductions, will now be included in the total interest deduction available for self-occupied properties. This means that the tax benefit will be extended to interest paid during the pre-possession period, aligning with earlier tax provisions.

2. Tax Deduction Limit:
   The maximum deduction available for interest on loans for self-occupied properties remains capped at ?2 lakh annually. This deduction applies only under the old tax regime.

3. Elimination of Ambiguity:
   Prior to this amendment, Section 22(2) of the Income Tax Act, 2025, did not clearly specify whether the ?2 lakh limit for interest deductions included interest from the pre-possession period. This ambiguity had created confusion and deviated from the established norms under the previous tax law, which clearly allowed deductions for both current-year interest and pre-possession interest.

4. Alignment with Previous Law:
   The amendment ensures that the current law aligns with the provisions of the Income Tax Act, 1961, where the ?2 lakh cap explicitly included both the interest for the current year and any pre-possession interest, which was allowed to be claimed in five equal installments.

5. Objective of the Change:
   The primary goal of this correction is to restore the clarity and consistency in the tax treatment of home loan interest, particularly in relation to the interest paid before the property is handed over. This change ensures that taxpayers benefit from the same tax treatment that was available under the Income Tax Act, 1961, without any unintended discrepancies.Section 22(2) Overview:

6. Under Section 22 of the Income Tax Act, deductions are allowed in the case of income from house property. Section 22(2) specifically states that the aggregate deduction for self-occupied properties, where the property is purchased or constructed with borrowed capital, is limited to ?2 lakh. With this amendment, the aggregate deduction for home loan interest now includes prior-period interest payable as well.

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