Deductions relating to Housing loan under Income Tax Act, 1961

Housing loan can save your income tax. EMI we pay for housing loan includes two things principal amount and interest amount. Principal amount is deductible u/s 80C and interest paid on housing loan is deductible u/s 24 of Income Tax Act, 1961.

Here below provisions of Income Tax Act relating to tax planning with housing loan are discussed.

Deduction of Interest amount on housing loan: Section 24 of Income Tax Act provides for deduction of interest paid on borrowed capital taken for acquiring, constructing, repairing, renewing or reconstruction of a house property from the Net Annual Value of a House Property. The amount of interest payable on such borrowed capital is allowable as deduction on accrual basis.


Thus Housing loan must have been taken for acquiring, constructing, repairing, renewing or reconstruction of a house property before deduction u/s 24 is allowed.

House property for the purpose of deduction u/s 24 excludes property which the assessee occupies for the purpose of any business or profession carried on by him, the profits of which are chargeable under the head Profits and Gains from Business and Professions. However interest paid on capital borrowed for construction , acquisition etc of a property used for business or profession can be claimed as deduction against the profits of such business or profession.

Interest on pre-construction period: It may so happen that money is borrowed earlier and acquisition or completion of construction takes place in any subsequent year. Meanwhile interest becomes payable. In such case interest paid/payable for the period prior to the previous year in which the property is acquired/constructed will be aggregated and allowed in five successive financial years starting from the the year in which the acquisition/construction was completed.

In simple words interest paid or payable on borrowed capital in the pre-construction period is not allowed to be deducted in the pre construction period but only after the construction has been completed and that too in 5 equal installments beginning from the year in which the property has been acquired or constructed.

Pre-Construction period means the period beginning from the date of loan taken till the end of 31st March preceding the date of completion of construction on date of repayment of loan or on the date of repayment of loan, whichever is earlier.

Deduction in respect of one self occupied house: In case of self occupied house where annual value is taken as NIL, the assessee is allowed a deduction of interest paid/payable on capital borrowed for acquisition or construction of house property(including 1/5th of the accumulated interest of pre-construction period).

Limit upto which  interest can be claimed: In case of rented house property there is no monetory limit as to deduction of interest on capital borrowed.

But in case of self occupied house deduction of interest is allowed as under:

(a)    Where the property is acquired or constructed with capita borrowed on or after 01-04-1999 and such acquisition or construction is completed within 3 years of the end of the financial year in which the capital is borrowed, the deduction will be allowed of actual interest payable subject to maximum of Rs. 150000 if certificate to the effect is taken from the person to whom such interest is payable specifying the amount of interest payable by the assessee for the purpose of acquisition/construction of the property.
(b)   In any other case i.e borrowed for repairs or renewal or where conditions mentioned in clause (a) above are not satisfied, deduction is allowed of actual interest payable subject to maximum of Rs. 30000.

Thus the deduction of interest of Rs. 30000 is allowed for the purpose of repair or renewal or reconstruction of house property where as the deduction to the maximum of Rs. 150000 is allowed only for acquisition or construction of house property, subject to other conditions as mentioned in clause(a) above are satisfied. Thus if other conditions mentioned in clause (a) above are not satisfied i.e capital is borrowed before 01-04-1999 or house property is not completed within 3 years of the end of financial year in which the capital is borrowed, then deduction of interest shall be allowed to the maximum of Rs. 30000.

Section 25 of Income Tax Act provides that interest on money borrowed which is payable outside India shall not be allowed as deduction u/s 24(b), unless the tax on the same has been paid or deducted at source and in respect of which there is no person in India, who may be treated as agent of the recipient for such purpose.

Some other points notable:
Where a fresh loan is taken to repay the original loan if the second loan has really been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loan would also be allowed as a deduction u/s 24(1)(iv). (Circular No. 28, dated 20.8.1969)

Interest on Interest is not deductible. The assessee is entitled to deduct only the interest payable on the capital borrowed, and not the additional interest which because of his failure to pay the interest on the due date is considered as a part of loan.[CIT v. Saifuddin M. Moonum 1990 Tax LR 328 (Bom)]

Any amount paid for brokerage or commission of the loan will not be allowed as deduction. [Circular No 28, dated 20.8.1969]

Deduction of Interest paid on housing loan is allowed to the owner of the house property only and not to any other person paying on behalf of such owner.

Deduction u/s 80C of Income Tax Act: Section 80C of Income Tax Act also provides for deduction of principal amount of housing loan repaid subject to a maximum of Rs. 1 lakh including other deductions allowabvle u/s 80C to 80GGC.

Section 80C(xviii)provides deduction of any payment made  for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” (or which would, if it had not been used for the assessee’s own residence, have been chargeable to tax under that head), where such payments are made towards or by way of—
      (a)  any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or
      (b)  any instalment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or
      (c)  repayment of the amount borrowed by the assessee from—
      (1)  the Central Government or any State Government, or
      (2)  any bank, including a co-operative bank, or
      (3)  the Life Insurance Corporation, or
      (4)  the National Housing Bank, or
      (5)  any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes which is eligible for deduction under clause (viii) of sub-section (1) of section 36, or
      (6)  any company in which the public are substantially interested or any co-operative society, where such company or co-operative society is engaged in the business of financing the construction of houses, or
      (7)  the assessee’s employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act, or
      (8)  the assessee’s employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society; or
      (d)  stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee,

However if the assessee transfers the house property, in respect of which deduction has been claimed, before the expiry of 5 years from the end of the financial year in which possession of such properties obtained by him, no deduction shall be allowable in the previous year in which the house property is transferred. The asggregate deduction allowed in the past years shall be deemed to be income of the assessee of the previous year in which the house property is transferred.



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