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Additional deduction for interest on housing loan | CA. Prakash Hegde & CA Raghavendra N.

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 Additional deduction for interest on housing loan

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CA. Prakash Hegde & CA Raghavendra N.

Under the provisions of section 24 of the Income Tax Act, 1961 (‘the Act’) a deduction is available for interest payable on the capital borrowed for acquisition or construction or repair or renewal or reconstruction of a house property.  In the case of a house property which is self-occupied as stated in section 23(2) of the Act, the amount of deduction for interest is generally available up to Rs 30,000 per year.  However, if the housing loan is borrowed on or after 01 April 1999 for the purpose of acquisition or construction and is self-occupied and the acquisition or the construction is completed within 5 years[1] from the end of the financial year (‘FY’) in which the loan was borrowed, the deduction available for interest on loan is Rs 2,00,000 per year.  These monetary ceilings for deduction for interest are applicable only for the self-occupied house property.  For the let out property, the deduction for interest is available without any limit.

Provisions of section 80EE introduced by Finance Act, 2013 provided an additional deduction of up to Rs 1,00,000 towards interest paid on housing loan, subject to certain conditions.  This deduction was in addition to the above limits prescribed under section 24 of the Act.  However, this additional deduction was restricted to a total amount of Rs 1,00,000 within a period of two FYs i.e. 2013-14 and 2014-15.

The Finance Act, 2016 has reintroduced the benefit under section 80EE with some minor modifications.  The following are the important provisions relating to the claim of this additional deduction for interest on housing loan which is effective FY 2016-17:

  • The additional deduction is available only to individuals.
  • The deduction is available on interest payable (whether paid or not) on loan taken for acquisition of residential (not commercial) property.
  • The loan should have been sanctioned by the financial institution (i.e. a bank or a housing finance company) between 01 April 2016 and 31 March 2017.
  • The amount of loan should not exceed Rs 35 Lakh.
  • The value of the house property should not exceed Rs 50 Lakh.
  • The assessee should not own any ‘residential’ house property on the ‘date of sanction of loan’.
  • The amount of deduction for interest on housing loan shall not exceed Rs 50,000 for the FY.
  • The deduction is available for FY 2016-17 and subsequent FYs.
  • Double deduction i.e. deduction under the provisions of this section as well as under any other provisions of the Act is not allowed.

As one can note, the benefit is intended to help tax payers in the middle income class who do not own a house property and want to purchase within the limit of Rs 50 Lakh.  Though the term ‘value’ of the house property is understood to mean that it includes the cost of registration etc. it would be better if the CBDT clarifies the meaning of the same.  It may also be noted that under section 24, as the deduction for interest on housing loan for a let out property is available without any limit, this additional deduction is to no avail.

The above amendment has not altered the deduction which a house property owner can claim under section 80C in relation to repayment of principal amount of the housing loan. In this regard, it is important to note that the deduction of Rs 1,50,000 under section 80C for repayment of housing loan principal is inclusive of other investments like life insurance premium, provident fund, public provident fund etc.

Keeping in mind the benefits available under section 24, 80C and 80EE of the Act, one may note that a proper tax planning could help an individual to claim a total benefit of Rs 4,00,000 even in the case of self-occupied property.

Below is a comparison chart of the maximum deductions that can be claimed by an individual tax payer for various FYs:

Deductions For FY 2013-14 For FY 2014-15 For FY 2015-16 From FY 2016-17
Under Section 24 – towards interest on housing loan Rs 1.5 Lakh Rs 2 Lakh
Under section 80C – towards repayment of principal of housing loan Rs 1 Lakh Rs 1.5 Lakh
Under section 80EE – towards additional deduction for interest repayment on new house Rs 1 Lakh in total[2] Not Available Rs 50,000
Total maximum deduction Rs 3.5 Lakh Rs 3.5 Lakh Rs 3.5 Lakh Rs 4 Lakh

 

[1] Increased from 3 years with effect from financial year 2016-17

[2] The overall limit of deduction for FY 2013-14 and 2014-15 is Rs 1,00,000 only