Treatment of Interest on Home loan

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1.Allowed as deduction from Income from House Property

Interest on money borrowed can be deducted from the Income from House property i.e. the Rental Income. The same is allowed by the purview of section 24(b) of Income Tax Act, 1961.

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2. Are there any purposes defined for which money can be borrowed for the purpose of claiming a deduction?

Yes, the deduction of Interest paid can only be allowed if the loan is taken for the following specified purposes:

1. acquisition (purchase),

2. construction,

3. repairs,

4. renewal or reconstruction (renovation)

5. also, the interest on a loan taken to repay the original loan is also allowed for deduction.

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3. Is there any Limit for deduction?

Yes, the maximum amount allowed a deduction under section 24(b) is Rs. 2,00,000/- (Indian Rupees Two Lakhs Only)

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This limit of Rs. 2,00,000 (Indian Rupees Two Lakhs) applies to all mix of properties

Further, the following is also required to be noted:

Particulars Conditions
A.     If the loan was taken before April 01, 1999 Deduction cab be taken for a maximum amount of Rs 30,000 only.
B.     If the loan is taken on or after April 01, 1999 •       Where loan is taken for acquisition (purchase) or construction of house &

•       such construction or acquisition is completed in 5 financial years from when the loan was taken

Deduction can be taken for a maximum amount of Rs. 2,00,000.

•       Where loan is taken for the purpose of repairs, renewals, or reconstruction

Deduction can be taken for a maximum amount of Rs. 30,000

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Let us understand the above with example:

Mr. X is having 2 house properties, for the acquisition of both the properties he has taken the loans.

Particulars Nature of Occupation Interest paid during the Financial year Rent Received
Property 1 Self-Occupied 2,25,000
Property 2 Let out 2,50,000 1,80,000

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Calculation of Deduction of Interest:

Property Income from House Property Amount
Property 1 – Self-Occupied Annual Value                           NIL

Less: Interest                      2,25,000

Total                                   -2,25,000

-2,25,000
Property 2 – Let Out Annual Value                     1,80,000

Less: Interest                     2,50,000

Total                                   -70,000  

-70,000
Total -2,95,000
Net deduction (up to a maximum of Rs. 2,00,000) -2,00,000
Note: Rs. 70,000 will be allowed as carry forward of Losses under House Property

Also, it is to be noted that, the excess of Rs. 25,000 on self-occupied property will not be carry forward as loss under head house property)

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4. How the Interest on loan for the construction period is considered for deduction?

The deduction of the interest as mentioned above can only be claimed if the property is under the possession of the borrower and the construction is completed within the prescribed time of 5 years.

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There can arise the following two cases:

Particulars Remarks
Interest for Pre-Construction Period or Pre-Possession period Interest payable for pre-construction or per-possession period can be claimed as deduction over a period of 5 years in equal annual instalments starting from the year of acquisition/ possession or completion of construction.
Interest for previous year (financial year) in which possession was received or the construction was completed and onwards Interest relating to the year of acquisition or completion of construction can be fully claimed as deduction in that year irrespective of the date of completion/acquisition.

 

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5. Are there any other provisions where the deduction of Interest can be availed for loan taken for house property?

The answer to this is Yes. Please refer to the below mentioned provisions:

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1. Deduction for interest on loan borrowed for acquisition of house property by an individual [Section 80EE]

An individual who has taken a loan for the acquisition of residential house property from any financial institution. Interest payable on such loan would qualify for deduction under this section.

Condition to be met for such deduction:

  • Value of house ≤ Rs 50 lakhs
  • Loan borrowed ≤ Rs 35 lakhs
  • Loan should be sanctioned during the P.Y. 2016-17.
  • The benefit of deduction under this section would to be available till the payment of loan continues.
  • Deduction Allowed: the maximum deduction allowable is 50,000. This deduction is over & above the deduction of up to Rs. 2,00,000 allowed under section 24(b).

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2. Deduction in respect of interest payable on loan taken for the acquisition of residential house property. [Section 80EEA]

An individual who has taken a loan for the acquisition of residential house property from any financial institution. Interest payable on such loan would qualify for deduction under this section.

Conditions to be met for such deduction:

  • Stamp value of house ≤ 45 lakhs
  • The individual should not be eligible to claim deduction under section 80EE
  • Loan should be sanctioned by a financial institution during the Previous Year 2019-20.
  • The benefit of deduction is available from A.Y. 2020-21 and subsequent assessment years till the repayment of loan.
  • Deduction Allowed: The maximum deduction allowable is 1,50,000. This deduction is over & above the deduction allowed in section 24(b) of Rs. 2,00,000.

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