This is generally in the case of home loan. Let us understand as to how it functions.
If you have borrowed a home loan, you will begin to pay your Equated Monthly Installments (EMIs) right after the entire loan amount has been disbursed to you by the bank. The amount of your EMIs depends on various factors like the amount of the loan, tenor, interest rate, mode of calculation etc.
Shorter the EMI, higher will be the EMI amount. Longer the tenor, lower will be the EMI amount. It should also be noted that in case of longer tenures, during the initial period, the interest component is more and the principal component is less, and through subsequent years the phenomenon Is reversed as in, the principle component becomes more and the interest component less, since, in the initial phase, the loan amount outstanding is more as compared to the later years.
Now, Pre-EMIs are applicable in those situations where the builder receives only partial payments during the course of the construction process. Although, the actual loan repayment will start only when the entire loan amount is disbursed to the builder, when you make partial disbursements you will have to pay pre-EMIs. Only the interest accrued on the disbursed money is paid.
You as a borrower can benefit from the tax deductions on these Pre-EMIs, only when the construction of your home is completed. Once the construction is completed, the total pre-EMI interest paid is deductible in five equal installments in the subsequent years.
For example, if you have paid Rs 5 lakhs as the pre-EMIs, then Rs 1 lakh will be shown in the next five years as tax deduction. Pre-EMI is only the interest paid during the period. If you have paid any principal amount, it is not eligible for tax deduction.