We all know that deduction for interest paid on home loan or capital borrowed for acquiring a house is Rs. 2,00,000. But it is not always true. There are certain cases where the deduction for interest paid on home loan is restricted to Rs. 30,000 only. In this article, we will be discussing those circumstances.
The provision related to deduction of interest paid on home loan is contained in Section 24(b) of the Income Tax Act, 1961.
Section 24(b) is reproduced below for ready reference –
24. Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely:—
(a) . . . . . . . . . . . ;
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction or, as the case may be, the aggregate of the amount of deduction shall not exceed thirty thousand rupees :
Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed, the amount of deduction 40[or, as the case may be, the aggregate of the amounts of deduction] under this clause shall not exceed two lakh rupees.
Explanation . . . . . . . . . . . .
From the reading of the first proviso to section 24(b), one can find that deduction for interest paid on home loan is limited to Rs. 30,000.
However, this proviso is applicable only for a house property mentioned in Section 23(2) of the Act.
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Section 23(2) refers to a self-occupied house property only which is-
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Section 23(2) refers to a self-occupied house property only which is-
(a) in the occupation of the owner for the purposes of his own residence; or
(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,
Basically, in the above two cases, the house property shall be considered as a self-occupied house property.
Therefore, the plain reading of the first proviso establishes that deduction for interest paid on home loan used for acquiring a house property which is self-occupied by the borrower or owner is limited to Rs. 30,000.
Limiting the deduction for interest paid on home loan
But this is not the only case of limiting the deduction for interest paid on home loan to Rs. 30,000. The second proviso to Section 24(b) provides that –
(a) where the property referred to first proviso i.e. a self-occupied house property
(b) is acquired or constructed with capital borrowed
(c) on or after the 1st day of April 1999 and
(d) such acquisition or construction
(e) is completed within five years
(f) from the end of the financial year in which capital was borrowed
then the amount of deduction shall not exceed Rs. 2,00,000.
Conditions when deduction for interest paid on home loan is reduced to Rs. 30,000
In nutshell, if the self-occupied house property is acquired or constructed out of home loan taken on or after 01.04.1999 and such acquisition or construction is completed with 5 years then the limit of deduction on account of interest paid on home loan is Rs. 2,00,000.
The limit of deduction of Rs. 2,00,000 comes with the satisfaction of both conditions.
If any one of the two conditions is not satisfied then the second proviso will not apply and the limit of deduction will be governed by the first proviso and the limit on account of interest paid on home loan will be Rs. 30,000.
Further, the limit of deduction on interest paid on home loan is reduced to Rs. 30,000 where the house building loan is taken for renovation or repairing of an existing house.
Further, the limit of deduction on interest paid on home loan is reduced to Rs. 30,000 where the house building loan is taken for renovation or repairing of an existing house.
Therefore, if the home loan is taken before 01.04.1999 the maximum amount of deduction for interest paid on home loan is Rs. 30,000.
If the home loan is taken after 01.04.199 but the acquisition or construction is not completed with 5 years, the second proviso will fail to apply and the maximum amount of deduction for interest paid on home loan is Rs. 30,000.
Thus it is important to satisfy both the conditions to avail maximum deduction of Rs. 2,00,000 for interest paid on home loan.
It is important to note that both the proviso applies only to a self-occupied house property and not to a let-out house property.
The conditions are summarised in the chart below-
Satisfaction of twin Conditions and eligibility to claim maximum amount of deduction
|
Loan taken on or after 01.04.1999
|
Acquisition or Construction is complete within 5 years
|
Maximum amount of deduction on account of interest paid on home loan can be claimed for Rs. 2,00,000
|
Yes
|
Yes
|
Maximum amount of deduction on account of interest paid on home loan can be claimed for Rs. 30,000
|
No
|
No
|
Maximum amount of deduction on account of interest paid on home loan can be claimed for Rs. 30,000
|
Yes
|
No
|
Maximum amount of deduction on account of interest paid on home loan can be claimed for Rs. 30,000
|
No
|
Yes
|
The condition of availing loan after 01.04.1999 will be satisfied in most of the cases and the said date is already passed. The said condition of acquiring the house property with 5 years will not create much problem since acquisition is mainly referred to a completed house property and the acquisition in most of the cases takes place instantly.
The main problem that one may face is with the satisfaction of condition as to completion of construction of the house property within 5 years. If a person takes the home loan for acquiring a under-construction property and if the builder delays the project and fails to complete the property within 5 years then the borrower will suffer from reduced amount of deduction available u/s 24(b) for the fault of the builder.
How to compute the period of five years?
The second proviso to section 24(b) states that acquisition or construction of the house property must be completed within five years from the end of the financial year in which capital was borrowed.
Let us understand the same with an example. An individual has taken the home loan on 20.04.2019 which falls in the financial year 2019-20. The financial year will end on 31.03.2020. Five years is required to be computed from this date and will fall on 31.03.2025. If the property is acquired or construction is completed by 31.03.2025 then he will be entitled to get the maximum amount of deduction for interest paid on home loan to Rs. 2,00,000. If the property is acquired or construction is completed after 31.03.2025, the limit of deduction will be Rs. 30,000 only.
Conclusion
One should keep the above provisions and limit of deduction of interest paid on home loan while filing the Income Tax Return.
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