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HOUSING INTEREST, HOW INTERESTING?

Deduction for interest on housing loan being allowable on ‘payable basis’ can be claimed, though actually not paid!

Today’s Tax Clues deals with some very interesting issues raised by readers in relation to deduction for interest and repayment of housing loan.

Query:  I am desirous of investing in a house and need a Housing Loan of Rs.20,00,000.  An institutional loan would mean adhering to a strict schedule of interest and installment payments and hence I am considering the option of availing such loan at 7.5% interest per annum from my Senior Citizen father, who would have no objection in granting me accommodation in payments so as to suit my liquidity convenience.  Being in the top tax bracket, I would like to know if I can avail tax deductions for housing interest and installment payments, if they are not actually paid during the year but deferred for payment in the later years as per my convenience.    

                                                                               -Swapnil Vyas

Reply:  Section 24(b), which provides for deduction of interest on housing loan refers to the term ‘interest payable’ and not ‘interest paid’. Since this deduction is available on ‘accrual basis’, you can claim the benefit of interest deduction of Rs.1,50,000 (at 7.5% of the Rs.20,00,000) and save tax of Rs.46,350 (at 30.9%), though the interest is not actually paid by you during the year.  You will be required to furnish a certificate from your father from whom you have borrowed the capital specifying the amount of interest payable by you for the year.  Your father may also be well advised to show this interest income on accrual basis and being a Senior Citizen, he may be able to plan zero tax liability.

However, as regards the deduction for payment of installments of housing loan under Section 80C, the same is available only in respect of actual repayment and that too if the amount is borrowed from the Government, Bank, LIC, Housing Finance Institution or an employer being a Company, Co-operative Society, Local Authority, University or College.  Repayment of housing loan installments from a private source, as in your case, is not eligible for deduction under Section 80C. You would, therefore, be required to plan other investment options for availing the benefit of this deduction.

HOUSING LOAN FOR REPAIRS AND EXTENSION

Query: I am residing in my house which was constructed a few years ago and the housing loan for which has been fully repaid. I am proposing to undertake some major repairs and extension of my present house. If I get a loan from my employer for the said purpose, can I get the benefit of any deduction in respect of interest paid thereof?

-K. M. Pillai

Reply: You have raised an important question. The common perception in regard to deductibility of interest paid on housing loan is that such loan should have been borrowed either for purchase or construction of a house. However, Section 24(b), which provides for deduction in respect of interest payable on borrowed capital, clearly states that such capital can be borrowed either for ‘acquisition, construction, repair, renewal or reconstruction of a house.’

In view of the above, you should have no difficulty in claiming the deduction of interest payable by you in respect of the loan taken for purposes of repairs and extension of your self occupied house. However, you should bear in mind that the amount of deduction in this regard shall be subject to the monetary ceiling of Rs.30,000, since the higher limit of Rs.1,50,000 is applicable only in respect of a new house purchased or constructed with borrowed capital.

JOINT INVESTMENT FOR MAXIMUM BENEFIT

Query: I and my wife are both working in a large private sector company and our annual taxable income is more than Rs.8,00,000 each. We want to take a house investing about Rs.30,00,000. We are in a position to get a housing loan for this amount at 10% interest per annum. How should we plan to avail of the loan so as to ensure that we can enjoy the maximum tax benefits under the Income-tax Act?

-Pratap Kumar Nigam

Reply: Since both you and your wife are earning income attracting the maximum tax bracket, you should plan to avail the housing loan jointly. You should also keep in mind that under Section 24 of the Income-tax Act, in respect of a residential house purchased or constructed, the deduction for interest on housing loan is available at Rs.1,50,000. In your case for the loan of Rs.30,00,000, you would be required to pay annual interest @ 10% starting from Rs.3,00,000. The advantage of taking a joint loan in equal proportions would be, that both you and your wife can claim full deduction of Rs.1,50,000 each.

By getting deduction of interest of Rs.1,50,000 in each case you would effectively save income-tax @ 30.9% of Rs.46,350 each.

You should also keep in mind that in respect of repayment of principal amount of housing loan, both of you would be eligible for claiming deduction under Section 80C, within the limit of Rs.1,00,000 each. Accordingly both of you could also save further income-tax of upto Rs.30,900 each.

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