Deduction of Interest on borrowed capital under the Income tax act

Interest on home loan taken to acquire or construct the property often confuses the taxpayer about its tax treatment. Salaried or Business class person generally take home loan when property is acquired and constructed. For the initial period huge interest is paid in comparison to principal amount of home loan, hence it becomes important to understand that how can you save income tax by acquiring property and interest paid on such acquired property.

Income tax act has specified section 24(b) on Interest on Borrowed capital, which states that Interest on borrowed capital is allowed as deduction from your income where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. However it is deductible in case of two self-occupied properties subject to a maximum limit prescribed under the income tax act.

Maximum ceiling limit of Rs. 2,00,000 of interest is allowed as deduction if following three conditions are satisfied:

  • You should have taken the loan amount on or after April 1, 1999 for acquiring or constructing a property.
  • The acquisition or construction should be completed with in 5 years from the end of the financial year in which loan was taken.
  • Taxpayer should furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.        

Important points:

  • Loan taken prior to April 1, 1999 will carry deduction of interest up to Rs. 30,000.
  • If capital is borrowed or loan is taken other than acquiring or constructing the property, then maximum amount of deduction on account of interest is Rs. 30,000. For example, reconstruction, repair, or renewal of home.
  • Interest is to be allowed as deduction for only that part of loan which has been taken and utilized for construction or acquisition.
  • If any of the above three conditions are not satisfied, then interest will be allowed for deduction up to Rs. 30,000.
  • Interest on borrowed capital is allowed on accrual basis under the income tax act.
  • The borrowed capital should be utilized exclusively for the purchase of property, making it mandatory to get the borrowed capital prior to the purchase of property, failing which deduction under section 24(b) shall not be allowed (Vijay Aggarwal vs CIT 236 Taxman 542)
  • Penal interest levied by bank on default of repayment of borrowed capital cannot be claimed as deduction. (Naman Kumar vs CIT 221 ITR Taxman 269)
  • Interest on fresh loan utilized in repaying the original loan taken for above specific purpose will be equally allowed.
  • Interest prior to the year of acquisition or construction is equally allowed as deduction over five years.
  • Deduction will not be allowed unless taxpayer furnishes a certificate in respect of interest payable.

Deduction in respect of interest on loan taken for residential house property (Section 80EE):

This section is applicable from assessment year 2017-18 onwards. Deduction under this section on loan taken for acquiring the residential property is allowed up to the amount of Rs. 50,000 if the following conditions are satisfied:

  • Taxpayer is an Individual. He may be Resident or Non-resident;
  • He has taken a loan and loan is taken for acquiring residential house;
  • Loan is taken from financial institution;
  • Loan has been sanctioned by bank during financial year 2016-2017;
  • The loan amount sanctioned does not exceed Rs. 35,00,000;
  • Value of residential property should not cross Rs. 50,00,000;
  • You should not own any residential property on the date of sanction of loan;
  • Where deduction has been allowed under section 80EE, no deduction is allowed of such interest under any other provision of the income tax act.

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