Treatment of principal & interest on Home Loan under IT Act
There are 2 types of house property:-
- Self- occupied
- Let out (Rented)
Maximum one property will be considered as self-occupied.
If more than one property is owned by the assessee and none of the two is let out, then anyone property will be considered as self-occupied (at the option of the assessee) and all the others will be considered as let out. [Sec 23(4)]
Where a deduction under Income Tax is allowed for the principal amount?
The principal amount is allowed as a deduction up to the limit of Rs. 1,50,000/- (Before F.Y. 2014-15 Rs. 1,00,000) under Section 80C(2)(xviii). The following points shall be noted:-
- The loan must be taken for construction or purchase of a residential house property.
- The payment should not include any addition, alteration, renovation or repair of house property after the issuance of completion certificate by authority or after it has been occupied by owner or tenant.
- Payment of stamp duty, registration fees and other expenses for purposes of transfer shall be allowed as deduction.
- The house property purchased should not be sold within 5 years from the end of the financial year in which possession is obtained. [Sec 80C(5)(iii)]. If sold within 5 years, then-
- No deduction shall be allowed for that year.
- The deduction which was allowed for previous years shall be added to the income of the year and taxed accordingly.
How can interest on the home loan be treated under the Income Tax Act?
(A) Deduction u/s Section 24(b):-
- The loan can be taken from anyone. (No condition that it should be taken from the bank or financial institution only).
- The deduction can be claimed by all assessee i.e. individual/ HUF/ Co./ Firm etc.
In case of let out property:-
Interest is allowed as a deduction of full amount which is payable (it means even if the interest is not paid it will be allowed as deduction irrespective of the fact that assessee follows cash basis for maintenance of books) for that year u/s 24(b).
In case of Self-occupied property:-
As per the second proviso to Section 24(b), the maximum amount that will be allowed as the deduction will be Rs. 2,00,000/- if the following conditions are satisfied:-
- The loan is taken on or after April 1, 1999 (Here the condition is for the loan only and not for construction or purchase, so if construction or purchase is done before April 1, 199 even the condition will be met).
- The loan should be taken for construction or purchased of house property. (If the loan is taken for repair, renovation or renewals of house property then this condition shall not be met)
- Construction or purchase of house property should be completed within 5 years (3 years till F.Y. 2016-17) from the end of F.Y. in which the loan is taken.
- The person who has given the loan shall certify that the loan is given for the purpose of construction or purchase of house property.
If any of the above-mentioned conditions are not met, then the amount of deduction shall reduce to Rs. 30,000/-.
(B)Deduction u/s 80EE
- A loan can be taken from only a Bank or Financial Institution.
- A deduction shall be allowed only for an individual.
- A deduction shall be only for the purchase of residential House property. (Not allowed for construction).
- The maximum deduction shall be allowed is Rs. 50,000/-.
The following conditions shall be met:-
- The loan shall be taken between 01.04.2016 to 31.03.2017.
- The amount of loan shall not be more than 35 Lakhs.
- Value of the property shall not be more than 50 Lakhs.
- An individual does not own any residential house property at the time on which loan is sanctioned.
Finance Act, 2019 inserted a new section 80 EEA with respect to Deduction for interest on home loan taken for affordable housing. Click here to read more about it.
Can individual claim deduction of interest under both Section 24(b) and 80EE?
No. As per Section 80EE(4), if a person is claiming deduction of interest u/s 80EE then he cannot claim the deduction in any other provision of the Act.
Can interest on the second loan taken to repay the first loan be allowed as deduction?
Yes, interest on fresh loan taken to repay the old loan shall be allowed as deduction u/s 24 with a condition that the fact (fresh loan is taken merely for repaying the old loan) has to be proved to the ITO. – Circular 28, dated 20.08.1969
Whether interest paid on unpaid interest allowed as deduction?
Interest paid on unpaid interest is not allowed as deduction as only interest paid on capital borrowed is allowed as deduction. – Shew Kissen Bhatter v. CIT  89 ITR 61 (SC).
Can the interest paid to the seller be allowed as deduction?
If the buyer comes into an agreement to repay the loan amount with interest to the seller in installments then the interest paid will be allowed as deduction u/s 24. The buyer becomes the borrower and the seller becomes the lender. There is no requirement of a third party. – CIT v. Sunil Kumar Sharma  122 Taxmann 159 (Punj. & Har.)
Can the capital borrowed by an assessee in his own name for property in name of his wife or minor child be allowed as the deduction to the assessee?
Whereby virtue of clubbing of income, an income of wife or minor child is included in the income of assessee then deduction could not be rejected on the ground that loan is not in name of wife or minor child. – S.M.A. Siddique v. CIT 148 ITR 307 (Mad.).