What is the maximum deduction available for the interest payment on a housing loan for a self-occupied house property (as of FY 2014-15)?
Section 24 of the Income Tax Act provides for deductions on income from house property for the purpose of tax calculation. According to Section 24, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital shall be a deduction subject to the following conditions (for a self-occupied property).
The maximum deduction shall be Rs 2 lakh if –
a. the property is acquired or constructed with capital borrowed on or after 01-April-1999, and
b. such acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed.
If the above conditions are not satisfied, the maximum deduction shall be restricted to Rs 30,000.
The maximum deduction shall be Rs 30,000 if –
a. the property is acquired or constructed with capital borrowed before 01-April-1999.
b. if the capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property. Please note that this condition refers to reconstruction and repair and not construction or acquisition of the house property.
b. the property is acquired or constructed with capital borrowed on or after 01-April-1999 and such acquisition or construction is not completed within three years from the end of the financial year in which capital was borrowed.
A word on the year of loan borrowal.
In order to avail the maximum benefit of Rs 2 lakh, the assessee should have borrowed the housing loan on or after 01-Apr-1999 and the construction/acquisition should have been completed within 3 years from the end of the financial year in which the loan was borrowed.
However, the law does not explicitly state which year should be considered as the year of loan borrowal if the loan is taken across installments spread over more than one financial year.
For example, if the first installment of a housing loan is taken on 01-Apr-2008 and the last installment of the loan is taken on 31-Mar-2013, and the construction of the house property is completed in the financial year 2014-15, can the assessee claim the maximum deduction of Rs 2 lakh in FY 2014-15 if this is a self-occupied property?
The construction of the property is completed well within 3 years from the financial year in which the last installment falls. However, if the date of the first installment is considered as the loan disbursement date, the property cannot be construed to have been constructed within 3 years. So, how does one determine the year of loan borrowal?
Since the loan can be said to have been fully disbursed only after the last installment, one could consider the year of the last installment as the loan disbursal year for the purpose of tax calculation.
What if there are multiple loans for the same house property?
There are instances when there could be more than one housing loan taken for construction/acquisition of a property. In such cases, the law is silent on how the deduction on account of interest should be arrived at.
For example, let us assume that an assessee takes a housing loan and starts construction. Halfway during construction, the assessee takes another loan to complete construction. Let us also assume that the construction is completed after 3 years from the end of the financial year in which the first loan was borrowed while from the perspective of the second loan, the construction is completed within 3 years.
In the above case, there are two possibilities with regard to the deduction:
1. If the first loan is considered, the maximum deduction available shall be Rs 30,000.
2. If the second loan is considered, the maximum deduction available shall be Rs 2 lakh.
There is no clarity in law on which of the above loans should be considered for deduction when the assessee calculates the income from house property. We wonder if the assessee can make the choice as per her discretion.