It is necessary for an owner or a would-be owner of a house property to know the various modalities governing purchase and sale of a house as well as the related tax provisions. This article addresses such issues in their entirety.
U/s 23, annual value of a house or part of a house shall be taken as nil if it, (I) is in the occupation of the owner for his own residence or (ii) cannot be occupied by him because of his employment, business or profession at any other place and he has to reside at that place in a building not belonging to him. sen
If the assessee has more than one self-occupied house, the annual value of only one of such houses, at his option, can be taken as nil. All the others will be deemed to have been let out. The option can change from year to year.
The interest payable on capital borrowed (inclusive of processing fee) for acquiring, constructing, repairing, renewing or reconstructing the property is deductible with a ceiling of Rs 30,000 on self-occupied property. The enhanced limit of Rs 2,00,000 is applicable on loans taken on or after 1.4.99 but only for acquiring or constructing. The lower limit of Rs 30,000 continues to be applicable for loans taken for repairing, renewing or reconstructing.
This enhanced limit has 2 caveats —
(a) The acquisition or construction of the house should be completed within 5 years (raised from 3 years by Finance Act (FA) 2016) from the end of the year during which the loan is taken. and
(b) The assessee should obtain a certificate from the lender that such interest was payable on the amount advanced for acquisition or construction of the house, or as refinance of the principal amount outstanding under an earlier loan taken for such purpose.
The limit of Rs30,000 or Rs 2,00,000 is applicable only on interest related with a self-occupied house. If an assessee has two or more residential houses, only one of these of his choice shall be treated as self-occupied. Others, even if not actually let out, will be treated as deemed let out (= commercial property).
Unfortunately, 80C deduction is not available on commercial property. Fortunately, the restriction of the holding period of 5 years (after acquisition or construction) for deduction of capital repayment u/s 80C is not applicable to interest. Why have such minor differences in parallel provisions?
As observed earlier, interest up to Rs 2 lakh can be claimed on self- occupied properties. Interest paid on housing loan for an actually rented (or deemed to be rented) house was fully deductible (note the past tense).
In other words, the interest amount had to be first set-off from the rent received (under the head ‘Income from house property’) and the balance loss, if any, could be set-off against income under any other head.
The recent FA 2017 has inserted subsec(3) in Sec. 71 to put a cap of Rs 2 lakh per year on such a set-off under any other head.
The balance loss, if any, can be carried forward for similar set-offs for 8 subsequent years as per the normal provisions.
For clarity, suppose the rent received or deemed to be received is Rs1.50 lakh and the interest paid is Rs 4.00 lakh for the year. After the set-off of the interest against the rent, the resultant loss is Rs 2.50 lakh. Earlier, this entire Rs 2.50 lakh could be set off against other heads of income. But now, such set off is restricted to Rs2.00 lakh. The balance loss of Rs 50,000 can be carried forward.
Also, note that it is not as if the restiction is in relation to the amounts involved with a particular house property. That is, if a taxpayer has two or more let-out houses, acquired mainly through housing finance, the amount allowed to be set-off remains put at Rs 2 lakh against the total interest on all the loans put together.
In other words, the restiction of Rs 2 lakh is with respect to all properties the taxpayer owns put together and not with respect to one property.
Interest of Pre-construction
Both the deductions u/ss 80C and 24 are allowed only when the income from house property becomes chargeable to tax.
In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value should be known. The interest for the years prior to the year in which the property was completed, shall be deducted in equal installments for the year during which it was completed and each of the 4 immediately succeeding years.
It is obvious that this privilege of the spread is available only on loans taken for acquiring or constructing a house property. Similar facility is not available for repayment of capital u/s 80C.
If the construction or acquisition is completed anytime in a FY, the interest paid during the entire FY is deemed to be the normal interest though a part of the FY is pre-construction period.
In our next article we shall deal with the strategy one can adopt to take maximum benefit from housing loans.
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