The Income Tax Act provides a separate head for tax of ‘Income from House Property’ under Section 22 to Section 27.
Interest paid or payable on money borrowed for the purchase, construction, repair, or reconstruction of a house is allowed as a deduction. In case of a self-occupied property treated as such, the maximum deduction will be Rs 30,000 per annum.
If the funds have been borrowed for the acquisition or construction of a house after 1 April 1999, Rs 1.50 lakh will be deductible.
Interest on home loan is deductible
Interest on a loan availed to acquire a house is deductible under the Income Tax Act while computing total income under the head ‘Income from House Property’.
The relevant provisions are contained under Section 24 of the Income Tax Act. This interest amount is allowed as a deduction on an accrual basis – on due basis, even if it has not actually been paid during the year.
The primary condition is that you should borrow the money, and interest should be payable on the borrowed capital. The money may be borrowed for the construction, acquisition, repair or reconstruction of a property.
Property acquired with borrowed capital
In case a property has been acquired or constructed with borrowed capital, the interest payable on the amount borrowed for the period prior to the previous year in which the property has been acquired or constructed is also eligible for deduction.
The interest is deductible in five equal installments commencing from the previous year in which the house has been acquired or constructed.
The first installment is deductible in the year in which the construction of the property is completed or it was acquired and the balance four installments in the four subsequent years.
Capital borrowed for repairs or renovation
Under the Income Tax Act, for the purpose of computing income or loss under the head ‘Income from House Property’ for a self-occupied house, a standard deduction of Rs 30,000 is allowed against interest on borrowed capital.
However, a deduction against interest up to a maximum of Rs 1.50 lakhs per annum is available if the loan has been taken on or after April 1, 1999 to construct or acquire a house and the construction or acquisition was completed within three years from the end of the financial year in which the capital was borrowed.
This higher deduction is not allowed on capital borrowed for repairs or renovation of an existing house.
Date of commencement of construction
To claim the higher deduction on interest of up to Rs 1.50 lakhs, you should furnish a certificate from the bank, specifying the amount of interest payable.
An important condition to avail the higher deduction of interest is that the capital must have been borrowed on or after April 1, 1999 and the acquisition or construction of the house must have been completed within three years from the end of the financial year in which the capital was borrowed.
There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the house could have commenced before April 1, 1999, but as long as its construction or acquisition was completed within three years, from the end of the financial year in which the capital was borrowed, the higher deduction will be available.
The tax deduction of interest paid reduces the effective cost of a loan. In case of a self occupied house, the interest deduction of Rs 1.50 lakhs translates to about Rs 45,000 in savings of tax for a person in the 30 percent tax bracket.
For example, if a borrower has a total taxable income of Rs 10 lakhs and no home loan, he will be liable to pay tax on Rs 10 lakhs.
In case he has taken a home loan and the house is selfoccupied, and he pays an interest of Rs 1.60 lakhs during the year, he can claim Rs 1.50 lakhs out of his taxable income. So, his tax liability will be on Rs 10 lakhs less Rs 1.50 lakhs, which is Rs 8.50 lakhs only.