Mukesh Patel.in
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TAX INCENTIVES FOR HOUSING

Liberal deductions for interest on housing loan & repayment of loan installments are provided under the Income-tax Act!

If a taxpayer has taken a housing loan either for purchase, construction, repair, renewal or reconstruction of his house property, interest on the borrowed capital is allowable as deduction. Whereas there is no limit as regards the amount of interest allowable for deduction in respect of a property which is let out on rent, in case of a self occupied house property, the amount of interest allowed as a deduction is Rs.30,000.

With a view to give a boost to the house building activity, it was provided that where a property is acquired or constructed with capital borrowed on or after 1st April, 1999, the limit for deduction of interest of Rs.30,000 shall stand enhanced to Rs.1,50,000.

Following important points need to be borne in mind in this connection:

  • As the deduction is available on ‘accrual basis’ it can be claimed annually, even if the interest is not actually paid during the year.

  • As per the CBDT’s Instruction No.28 dated 20th August, 1969, interest paid on a fresh loan, taken to repay the original housing loan, is also allowable as deduction.

  • As per the CBDT’s Instruction No.363 dated 24th June, 1983, it has been clarified that in the case of Central Government employees, interest on house building advance taken under the Housing Building Advance Rules would be deductible on the basis of accrual of interest which would start running from the date of withdrawal of advance, although the actual liability of payment of the same would be in the future years. 

  • Interest payable by a taxpayer in respect of funds borrowed for the acquisition or construction of a house property and pertaining to the period prior to the financial year in which the said property has been acquired or constructed, is also eligible for deduction in five equal annual installments, commencing from the financial year in which the house is acquired or constructed.

ADDITIONAL ONE-TIME DEDUCTION

If a taxpayer has taken a housing loan from a Bank or Housing Finance Company during the period beginning on 1st April, 2013 and ending on 31st March, 2014 (i.e. during Financial Year 2013-14), an additional one-time deduction of up to Rs.1,00,000 of interest shall be allowed for interest paid on housing loan under the new provisions of Section 80EE. Where the interest payable during Assessment Year 2014-15 is less than Rs.1,00,000, the balance amount shall be allowed in Assessment Year 2015-16. However, it needs to be noted that this benefit shall be available only in the case of first time house buyers and where the amount of loan sanctioned for acquiring the residential house property does not exceed Rs.25,00,000. Moreover, it has also been stipulated that the value of the residential house property acquired should not exceed Rs.40,00,000.

DEDUCTION FOR REPAYMENT OF LOAN

 Section 80C of the Income-tax Act provides for deduction in respect of specified investments and allocations within the overall limit of Rs.1,00,000. In this list, payment of any installment in respect of a housing loan taken from specified agencies, also qualifies for deduction under Section 80C.

Thus, while the interest in respect of housing loan is deductible up to Rs.1,50,000 in the computation of total income, a separate deduction of upto Rs.1,00,000 out of the gross total income can be availed of in respect of the principal payment of specified loan installment.

DEFICIT ELIGIBLE FOR SET-OFF

Any deficit or loss arising under the head ‘income from house property’ is eligible for set-off against any other source of income of the taxpayer for the relevant assessment year. In the case of a self occupied house property, since the annual value of one such house owned by the taxpayer is treated as ‘Nil,’ the entire amount of interest payable on the housing loan would represent the amount of loss or deficit which would become eligible for set-off against other income of the taxpayer.

The good news for salaried taxpayers is that a specific provision has been made to the effect that interest on housing loan shall be allowed as an adjustment against the taxable salary for determining the tax to be deducted at source under Section 192 of the Income-tax Act.

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