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EMI moratorium on Home Loan and Tax Deduction


emi-moratorium-on-home-loan-and-tax-deduction


On 27th March 2020 RBI announced for EMI moratorium on the term and other loans which include Home Loans taken by Individuals on the backdrop of outbreak of COVID-19. This moratorium was initially allowed for three months for the period from March 2020 to May 2020 which is extended for next three months to August 2020. Hence, in total, a period of 6 months is allowed for EMI moratorium. The moratorium is spred between two financial years viz. FY 2019-20 and FY 2020-21. The moratorium is optional and one may opt or do not opt for the moratorium. Those who do not opt for the moratorium and continue to pay the EMI will get the tax benefits as he was getting, however, those who opt for moratorium may have to sacrifice some of the tax benefits which is discussed in this article.


The home loan which is taken for construction or acquisition of a house property may be a completed house or an under-construction house property. Further, the house property may be a residential or a commercial house property.


The amount of capital borrowed for acquiring or constructing the house property (commonly referred to ‘home loan’ in this article) has multiple tax benefits to the borrower under different provisions of the Income Tax Act, 1961.


Each of the provisions contains separate laws for allowing the tax benefits. For an Individual home loan borrower, the following tax benefits are being allowed-


ProvisionsMaximum of DeductionDeduction is allowed forDeduction is allowed on
Section 80CRs. 1,50,000Principal repayment of home loanPayment basis
Section 80EEARs. 1,50,000Interest payable on home loan taken for purchase of an affordable houseAccrual basis
Section 24Rs. 2,00,000 for self-occupied house property
No limit for let out house property
Interest payable on home loanAccrual basis

 

Generally, a home loan is repaid by way of EMIs by the individuals to the banks or other financial institutions.


 The EMI has two parts- Principal and Interest. Both the principal and interest are governed by two different provisions of the Income Tax Act, 1961. 


Deduction under section 80C


Income tax deduction for principal repayment is governed by section 80C.  The provisions of section 80C for claiming the deduction of principal repayment is stated below-


Principal amount on repayment of Home Loan: If a loan is taken for purchase or construction of a residential house property then the income-tax deduction for repayment of home loan to the extent of the principal amount is allowed under section 80C of the Income Tax Act, 1961.


From whom to borrow the money to claim the deduction of principal repayment:


(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, or


(6) any company in which the public are substantially interested or any co-operative society, where such a 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.


Withdrawal of tax benefits on transfer: If the taxpayer transfers the house property for which deduction for repayment of the principal amount of borrowed capital is claimed before the expiry of five years from the end of the financial year in which possession of such property is obtained by him then-


(a) no deduction for repayment of any principal amount of borrowed capital shall be allowed for the year in which the house property is transferred, and


(b) the deduction so allowed in an earlier year(s) shall be deemed to be the income of the taxpayer in the year of transfer.


Hence, it is mandatory to hold the house property for a minimum period of 5 years to enjoy the benefit of the income-tax deduction.


The maximum amount of deduction that can be claimed for deduction of repayment of principal amount under section 80C in a financial year is Rs. 1,50,000.


Repayment of Principal amount

Available to

Any person

Available for


Purchase or construction of a residential house property

Available for the amount borrowed from

Banks, Housing Finance Companies, LIC, NHB, etc.

Maximum amount of deduction

Rs. 1,50,000 in a financial year


Notes: The followings are noteworthy for deduction on principal amount of home loan repayment-

 

1. Deduction is available on payment basis. If the home loan is not paid, then no deduction will be allowed.

 

2. Deduction is available even if the residential house is under construction.

 

3. Deduction which is allowed u/s 24 will not be allowed u/s 80C. Interest on home loan is allowed as deduction u/s 24, hence the same will not be allowed u/s 80C.

 

4. Deduction is available is only for loan taken for purchase or construction of the residential house(s). If the loan is taken for addition or alteration to, or renovation or repair of, the house property which is carried out after the issue of the completion certificate or after the house property or any part thereof has either been occupied by the assessee or any other person on his behalf or been let out, then the deduction is not available.

 

5. Deduction for principal repayment of loan is available for a residential house only and not for other than a residential house viz. shop, godown, etc.

 

6. Deduction can be claimed for one or more than one residential house.

 

7. Deduction can be claimed by all the co-owners in case of jointly owned house property. For details on the topic read more here.

 

8. Deduction is not available if money is borrowed from other than specified persons like banks, etc. For example, if money is borrowed from money lenders, relatives, friends, etc. no such deduction for repayment of principal is available.


Impact of EMI Moratorium on income tax deduction under section 80C: As stated above, the income tax deduction for Principal repayment comprised in the EMI is allowed on ‘payment’ basis. If the loan is repaid only then deduction for principal is allowed under section 80C from the gross total income of the assessee. If the loan is not repaid, no deduction for principal can be claimed under section 80C.


When EMI moratorium is allowed there is no repayment of loan. Even if the EMI is deducted and subsequently refunded due to the moratorium being allowed, it amounts to non-repayment of the loan. Hence, once the loan or principal remains unpaid, no deduction can be claimed for the principal amount under section 80C.  Hence, a person opting EMI moratorium cannot claim deduction under section 80C for the principal amount.


Further, it should be noted that the moratorium is allowed from March 2020. Hence, the EMI paid from April 2019 to February 2020 is eligible for tax benefits. Hence, the principal amount comprised in the EMI paid for these 11 months is eligible for deduction under section 80C. If the moratorium is opted, only the principal amount of March 2020 will be ineligible for the deduction.


It should be noted that the EMI moratorium was announced on 27th March 2020. Hence, EMI due on or before this date might have been deducted on the due date and after opting moratorium, the deducted EMI for March 2020 is refunded in April 2020.


Legally speaking, one cannot claim a deduction for the principal amount for March 2020 if a moratorium for that month is opted even if the refund is given in April 2020 which falls in the next financial year. However, in practice, it is seen that in the interest certificate the banks are mentioning full 12 months EMI repayment for the FY 2019-20 without giving the effect of refund of March EMI in April. The same is adjusted in the ‘Provisional Interest Certificate’ for the next FY 2020-21. In the ‘Provisional Interest Certificate’ for the FY 2020-21, the bank is showing 11 months repayment as the provisional amount of EMI repayment.


The taxpayer should work out his own amount of deduction for principal repayment and should not blindly rely on the interest certificate given by the banks or financial institutions.


Deduction under Section 80EEA for interest on affordable housing home loan


Section 80EEA was introduced by the Finance(No. 2) Act, 2019. According to section 80EEA(1), in computing the total income of an assessee, being an individual not eligible to claim deduction under section 80EE, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.


From whom to borrow the money to claim the deduction of principal repayment:


The home loan must be borrowed from a bank or a housing finance company.


The maximum amount of deduction that can be claimed for deduction of interest payable on home loan under section 80EEA in a financial year is Rs. 1,50,000.


Interest on home loan u/s 80EEA

Available to

Individual only

Available for


Purchase of a residential house property having stamp duty value upto Rs. 45 Lakh

Available for the amount borrowed from

Banks and Housing Finance Companies

Maximum amount of deduction

Rs. 1,50,000 in a financial year


Notes: The followings are noteworthy for deduction of interest on home loan u/s 80EEA-

 

1. Deduction is available on an accrual basis. If the home loan remains unpaid, then also deduction will be allowed.

 

2. This deduction is in addition to the deduction of Rs. 2 Lakh available u/s 24 of the Income Tax Act, 1961.

 

3. This deduction is applicable from AY 2020-21.

 

4. The loan must has been sanctioned (not actually disbursed) by the financial institution between the period from 01.04.2019 to 31.03.2021.

 

5. The stamp duty value of the residential house (and not the actual consideration) property shall not exceed Rs. 45 Lakh.

 

6. The assessee does not own any residential house property on the date of sanction of loan.

 

7. Deduction of interest allowed under this section shall not be allowed as a deduction under any other provision of the Income Tax Act.

 

8. The deduction for interest on home loan u/s 80EEA falls under Chapter VI-A of the Income Tax Act. Hence, the amount of deduction cannot exceed the total income. In other words, the deduction under this section, cannot generate any amount of ‘Loss’ since the deduction will be limited to the total income.


Impact of EMI Moratorium on income tax deduction under section 80EEA: As stated above, the income tax deduction for interest amount comprised in the EMI is allowed on ‘accrual’ basis. It means, even if the loan is not repaid, the deduction for interest is allowed under section 80EEA from the gross total income of the assessee.


When EMI moratorium is allowed there is no repayment of the loan. Even if the EMI is deducted and subsequently refunded due to the moratorium being allowed, it amounts to non-repayment of the loan. Hence, once the loan or principal remains unpaid, no deduction can be claimed for a principal amount under section 80C but the deduction for interest can be claimed under section 80EEA.  Hence, a person opting EMI moratorium can claim deduction under section 80EEA for the interest amount.


Further, it should be noted that the moratorium is allowed from March 2020. Hence, the EMI paid from April 2019 to February 2020 is anyway eligible for tax benefits. Hence, the principal amount comprised in the EMI paid for these 11 months is eligible for deduction under section 80C. If the moratorium is opted, only the principal amount of March 2020 will be ineligible for deduction, but the deduction for interest under section 80EEA can be claimed for a full 12 months.


It should be noted that the EMI moratorium was announced on 27th March 2020. Hence, EMI due on or before this date might have been deducted on the due date and after opting moratorium, the deducted EMI for March 2020 is refunded in April 2020.


Legally speaking, one cannot claim the deduction for the principal amount for March 2020 if a moratorium for that month is opted even if the refund is given in April 2020 which falls in the next financial year. However, in practice, it is seen that in the interest certificate the banks are mentioning full 12 months EMI repayment for the FY 2019-20 without giving the effect of refund of March EMI in April. The same is adjusted in the ‘Provisional Interest Certificate’ for the next FY 2020-21. In the ‘Provisional Interest Certificate’ for the FY 2020-21, the bank is showing 11 months repayment as the provisional amount of EMI repayment.


The taxpayer should work out his own deduction for interest amount u/s 80EEA and should not blindly rely on the interest certificate given by the banks or financial institutions.


Deduction under Section 24 for interest on home loan


This is the old provision which is widely used by almost all the taxpayers to claim deduction for interest on home loan.


Under the income tax scheme of taxation of income from house property, there can be three types of house property-


1) Self Occupied House Property

2) Let-out House Property

3) Deemed to be Let-out House Property


Read Also: Understanding Set-off of Loss from House Property


Deduction for interest on borrowed capital


Section 24(b) contains the provisions related to the deduction of interest amount payable on borrowed capital for acquiring the house property from the annual value of house property.



The following points are noteworthy in the case of interest payable on borrowed capital:

 

1. When a person obtains a home loan, he repays the principal as well as pays interest. In normal circumstances, both the principal and interest are paid simultaneously in the form of EMI.

 

2. Tax benefit is available under the Income Tax Act both for the principal and interest but under different provisions. While the principal is allowed as deduction u/s 80C, the interest is deductible u/s 24(b).

 

3. Deduction u/s 80C is allowed only if the principal amount is paid to the lender during the previous year. In case, the principal amount is unpaid in the year, no deduction u/s 80C  can be claimed. On the contrary, the interest is allowed as a deduction even if the same is not paid during the previous year. In other words, the deduction for interest is allowed on due basis.

 

5. Deduction u/s 80C for principal repayment is allowed only if the loan is taken from prescribed institutions like banks, housing finance companies, etc. No such condition is imposed for claiming a deduction for interest u/s 24(b).

 

6. However, the deduction for interest amount u/s 24(b) will be allowed only on the basis of certificate issued by the lender certifying the interest amount payable for the acquisition or construction of the house property. This condition is attached for the acquisition or construction of the house property and not in the case interest is payable if the amount is borrowed for repair, renewal or reconstruction of the house property.

 

7. Deduction under section 80c is available only for the purchase or construction of a residential house property. Interest is available for repair, renewal or reconstruction also apart from purchase and construction.

 

8. Further, deduction for principal repayment of the loan, u/s 80C is available for a residential house only and not for other than a residential house viz. shop, godown, etc. Deduction for interest payable can be claimed for residential as well as commercial complexes, since section 24(b) does not restrict any usage on type of house property.

 

9. To claim the deduction for interest payable, it is not necessary to have a home loan. Even if a personal loan is used for purchase or construction of the house property then deduction is available provided the lender gives a certificate that the loan is used for the purchase or construction of the house property. In the case of banks, such a certificate is given only for home loans and not for personal or any other type of loans. Hence it is practically not possible to claim a deduction in such cases.

 

10. Deduction u/s 80C can be claimed even if the house property is under-construction. However, interest u/s 24(b) cannot be claimed for a house property during the construction period. It is allowed when the possession is taken.


The legal provisions related to deductions allowed under section 24(b) for interest payable on home loan from the computation of income from house property are explained hereunder.


Description

Nature of Deductions

Interest on Borrowed Capital

[Section 24(b)]

At first, deduction is allowed for the entire amount of interest payable on borrowed capital taken for-

a) acquisition

b) construction

c) repair, renewal or reconstruction

of the house property.

However, certain limits are prescribed for availing of interest amount as a deduction under various circumstances and conditions for self-occupied house property which are mentioned below in the next table.


Deduction for Self-Occupied House Property

Amount of deduction for interest payable on borrowed capital

(1) Where the self-occupied house property is acquired or constructed with capital borrowed on or after 01.04.1999

Aggregate amount of the deduction is limited to Rs. 2,00,000

(2) Where the acquisition or construction of the self-occupied house property is completed within 5 years from the end of the financial year in which capital is borrowed

(3) In any other case

[Cases that do not fall in (1) or (2) above. Thus capital borrowed for Repair or renewal or reconstruction of the house is covered here.]


Rs. 30,000

The aggregate amount of deduction under situations (1), (2) and (3) shall not exceed Rs. 2,00,000.


Read more on the limit of interest deduction of Rs. 30,000

Deduction for interest paid on loan is limited to Rs. 30000


Deduction for Let-out  House Property

Amount of deduction for interest payable on borrowed capital

Any house property which is let-out (either actually let-out or deemed to be let-out)

Entire amount of interest payable on borrowed capital is allowed as a deduction without any limit.


The limit of Rs. 2,00,000 - being the aggregate amount of deduction of interest payable - applies only for self-occupied house property or properties and not for let-out house property or properties.


If a person owns more than one self-occupied house property, then the combined deduction of interest payable shall not exceed Rs. 2,00,000 after taking into account the interest payable for all the self-occupied house properties.


The Interim Budget 2019 allowed a person to own two house properties as self-occupied house properties. The maximum amount of deduction on account of interest payable is Rs 2 lakh for both the self-occupied house properties. It is a wrong interpretation that the maximum amount of deduction for interest is Rs. 4,00,000 in this case.


Even though the Interim Budget 2019 has allowed a person to own two house properties as self-occupied house property without any further tax implication, but there is no enhancement in the limit of deduction from Rs. 2 Lakh for interest payable on borrowed capital. Prior to this amendment, a person was allowed only one house property as a self-occupied house property.


It is already stated that if a person owns more than two self-occupied house properties then such excess house property will be deemed to have been let-out.


It shall be remembered that the deduction for interest payable on a self-occupied house property and a let-out house property are mutually exclusive. In other words, it means if a person has three house properties, out of which two are self-occupied and one is let-out, then for the two self-occupied house properties, the person can claim a deduction for interest on borrowed capital up to Rs. 2,00,000 and for the let-out house property, he can claim the entire amount of interest payable on borrowed capital as a deduction.


Any interest paid in excess of Rs. 2,00,000 for self-occupied house property or properties shall be ignored and cannot be claimed in any succeeding assessment years. Such excess interest is lost forever


Illustration 1: Mr. Rakesh owns three house properties-House 1, House 2 and House 3. House 1 and House 2 are self-occupied whereas House 3 is let-out to a tenant for an annual rent of Rs. 3,00,000. Interest on home loan for the year is Rs. 1,70,000; Rs. 1,10,000 and Rs. 6,25,000 respectively for the three houses. The deduction for the amount of interest on borrowed capital is computed as under-

ParticularsHouse-1
(Self-Occupied)
House-2
(Self-Occupied)
House-3
(Let-out)
Annual ValueNilNil3,00,000
Less: Interest u/s 24(b)1,70,0001,10,0006,25,000
Income (Loss) from House Property(-)1,70,000(-)1,10,000(-)3,25,000
Maximum amount of loss from House Property allowed(-)2,00,000(-)3,25,000

Deduction of interest for under-construction property


As per the explanation to section 24(b), a deduction for interest cannot be claimed for an under-construction house property during the construction period. 


However, such a deduction is not lost. The interest paid during the construction period will be accumulated and the deduction will start from the financial year in which possession of the house property is taken by the assessee. 


However, the entire accumulated interest will not be allowed in one go. The accumulated interest will be allowed in 5 equal installments beginning from the financial year in which the possession is taken. 


Thus the assessee can claim 20 per cent of the interest paid during the construction period as a deduction after getting the possession of the house property. 


This is applicable only for under-construction house property. Such a situation does not arise if the house property acquired is a complete house property.


House property is considered as an under-construction if 'completion certificate' is not received from the competent authority in respect of such property.


Impact of EMI Moratorium on income tax deduction under section 24: As stated above, the income tax deduction for interest amount comprised in the EMI is allowed on ‘accrual’ basis. It means, even if the loan is not repaid, the deduction for interest is allowed under section 24 from the computation of income from house property of the assessee.


When EMI moratorium is allowed there is no repayment of the loan. Even if the EMI is deducted and subsequently refunded due to the moratorium being allowed, it amounts to non-repayment of the loan. Hence, once the loan or principal remains unpaid, no deduction can be claimed for the principal amount under section 80C but the deduction for interest can be claimed both under section 80EEA and section 24.  Hence, a person opting EMI moratorium can claim deduction under section 80EEA and section 24 for the interest amount.


Further, it should be noted that the moratorium is allowed from March 2020. Hence, the EMI paid from April 2019 to February 2020 is anyway eligible for tax benefits. Hence, the principal amount comprised in the EMI paid for these 11 months is eligible for deduction under section 80C. If the moratorium is opted, only the principal amount of March 2020 will be ineligible for deduction, but the deduction for interest under section 80EEA and section 24(b) can be claimed for a full 12 months.


It should be noted that the EMI moratorium was announced on 27th March 2020. Hence, EMI due on or before this date might have been deducted on the due date and after opting moratorium, the deducted EMI for March 2020 is refunded in April 2020.


Legally speaking, one cannot claim a deduction for the principal amount for March 2020 if a moratorium for that month is opted even if the refund is given in April 2020 which falls in the next financial year. However, in practice, it is seen that in the interest certificate the banks are mentioning full 12 months EMI repayment for the FY 2019-20 without giving the effect of refund of March EMI in April. The same is adjusted in the ‘Provisional Interest Certificate’ for the next FY 2020-21. In the ‘Provisional Interest Certificate’ for the FY 2020-21, the bank is showing 11 months repayment as the provisional amount of EMI repayment.


The taxpayer should work out his own deduction for interest amount u/s 80EEA & u/s 24 and should not blindly rely on the interest certificate given by the banks or financial institutions.


Deductibility of Interest on unpaid Interest


The period of EMI moratorium means the period in which no EMI is required to be paid without any default consequences. As a result, during the moratorium period, no EMI of the home loan is being paid by the assessee.


However, the RBI has made it clear that even if there is moratorium interest will continue on the outstanding or unpaid interest amount. Thus one has to pay ‘interest on interest’ under the moratorium scheme.


Unfortunately, the interest on unpaid interest will not be allowed as a deduction under section 80EEA or under section 24 since both the sections allow deduction of interest paid or payable on the loan amount. Similar views were expressed by the Hon’ble Supreme Court in the case reported as Shew Kissen Bhatter v CIT (1973) 89 ITR 61 (SC).


Conclusion


From the above discussion, it is clear that if EMI moratorium is opted, the deduction under section 80C towards repayment of the principal amount will get reduced and if the maximum amount of deduction of Rs. 1,50,000 u/s 80C was fulfilling with the principal repayment of home loan then shortfall will crop up and one may need to invest in other products to fill the gap of shortfall of Rs. 1,50,000. This, however, depends on the quantum of income of a person. This will not affect the claim of deduction for interest on the home loan under EMI moratorium. 


Further Readings:

Is Interest on Home Loan Allowed as Deduction under New Tax Section 115BAC

Prepayment Charges on Loan Closure allowed as Interest under 24(b)

Understanding Set-off of Loss from House Property

Deduction for interest paid on loan is limited to Rs. 30000



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