Guide to Housing Finance and Tax planning

Both the deductions u/s 24 on interest on housing loan and u/s 80C on principal repayment 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.

Now, the interest for the years prior to the year in which the property was completed, can be deducted in equal installments for the year during which it was completed and each of the four immediately succeeding years. Unfortunately, there is no corresponding provision for the deduction u/s 80C for capital repayment. Consequently the repayments effected before the transfer of the flat carry no concessions.

We strongly feel that the condition of completion should be dropped altogether, since its compliance depends upon the builder and not the taxpayer. In other words, delays by a builder end up punishing the assessee for no fault of his.

That being said, there are many decisions which condone delays under various situations —

Kishore H Galaiya v ITO[2012] 24 11 (Mum Trib): As long as the assessee has invested the requisite amount in construction of new residential house within 3 years from the date of transfer, but the taking of the possession was delayed because of default of the builder and other factors not under the control of the assessee the exemption cannot be denied.

Shashi Verma v CIT 152 CTR 227(NB) 1999 : In modern days it is not easy to construct a house within this stipulated period and under government schemes construction takes many years. Therefore, if substantial investment is made in the construction, then it should be deemed that sufficient steps have been taken to satisfy the requirements of Sec. 54.

16 210 (Chd – ITAT) [2011] : Sec. 54F does not prescribe completion of construction and its thrust is on investment of net consideration received on sale of original asset and start of construction of a new residential house.

  1. A. Tharabai v DCIT [2012] 19 276 (Che – Trib) : Assessee could not construct residential house within 3 years because owners of the land filed a petition for injunction on which civil court ordered status quo. It was held that the amount spent by assessee in purchasing land be allowed for deduction.

Obviously, much litigation will get avoided if this condition of completion is dropped.

The interest payable on capital borrowed for acquiring a housing property was exempt u/s 24 up to some specified limits if its acquisition or construction was completed within 3 years from the end of the year in which the capital was borrowed. Finding that in the current scenario, this requirement has become too tight, the limit of 3 years has been raised to 5 years. Corresponding amendments have not been inserted for Sec. 54 and Sec. 54F related with exemption of LTCG.

Hopefully, the corrective action will be taken by the next Budget.

Loan to Repay Loan

If you find that it is quite beneficial to borrow funds for the express purpose of repaying the old loan, go ahead. Loan taken from a permissible source to extinguish loan from another permissible source, continues to have the benefit (Circular 28 dt 20.8.69).

The following is the relevant part of the Circular —

“If the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income Tax Officer, the interest paid on the second loan would also be allowed as a deduction u/s 24(1vi).”

This gives rise to two issues —

  1. The interest on the second loan continues to get the benefit of the deduction u/s 24. Unfortunately the Circular has not extended the benefit to deduction u/s 80C. So will the repayment of the second loan attract tax deduction u/s 80C?
  2. Suppose, the first loan is taken before 1.4.99 and the second after that date. Does the ceiling go up from Rs. 30,000 to Rs. 2,00,000? Logically, since the second loan maintains the continuity and does not change the colour and character of the first loan, the deduction should stay put at Rs. 30,000. However, many housing finance companies push their products claiming that the second loan gives the borrower the right to claim higher deductions.

CBDT clarification is necessary on both these issues.

Joint Loans

In the case of joint holding of property, both the holders will be able to claim the concessions separately, if and only if, their individual share in the property and also in the loan is defined and ascertainable.

Unfortunately, housing loans are not normally granted to those who go in for flat in joint names, unless the other holder becomes a co-borrower. In the case of default, when one defaults and the other does not, it is impossible to evict both of them.

However, in the current situation of stiff competition, there are some banks who agree to give joint loans. If you are lucky to find some such bank, both of you can avail of the deductions u/s 80C as well as u/s 24.

Now, take an extreme case where the first holder is in the 30% tax zone and the second holder is in the nil zone. In such a situation the first holder would like to pay the entire EMI and claim the entire benefit. Can he do so?

The answer is in the negative. The ratio would have to be the same as it is for the property holding. But to be able to get 100% deduction for the first holder, both for Sec. 80C as well as Sec. 24, they can play a neat trick. The second holder gives a gift of his / her share of the property to the first. Once the loan is paid off, the first holder can ‘re-gift’ the share of the property back to the second holder. Note that the act of gifting property between relatives is tax-free.

We will examine more such tax planning tips and tricks in future columns.

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