When Rs. 2,00,000 maximum interest deduction not available on SOP

We all think that we are eligible for Interest Deduction U/s. 24(b) up to Rs. 2,00,000/- on home loan taken for Self Occupied property. But many taxpayers are not aware that in some cases the deduction of  Housing Interest on Self Occupied Property is available only upto Rs. 30,000/- instead of Rs.  2,00,000/-. In this article we have discussed Such provisions.

Interest on borrowed capital for self occupied property–

The maximum amount of interest permissible in cases of self-occupied property is Rs.2,00,000/- (in respect of funds borrowed on or after 01.04.1999). Interest upto Rs. 2,00,000is deductible if the following conditions are satisfied:

• capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;
• the acquisition/construction should be completed within 5 years from the end of the financial year in which capital was borrowed; and
• the person extending the loan certifies that such interest is payable in respect of 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 acquisition or construction.

In the above context the following further aspects have to be kept in view:

1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum deduction on account of interest is Rs. 30,000 (and not Rs.2,00,000).

2. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before April 1,1999 but, as long as its construction! acquisition is completed within 5 years, the higher deduction of Rs. 2,00,000 would be available. Also, there is no stipulation regarding the construction!acquisition of the residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in part. However, the higher deduction upto Rs.2,00,000 can be taken for the loan which has been taken and utilized for construction!acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of interest upto Rs. 30,000 only (CBDT’s circular No. 779, dated September 14, 1999).

All about Income from House Properties

Rs. 2,00,000 maximum deduction will not be available in the following situations:

i. If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a house property;

ii. if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property; and

iii. if capital is borrowed on or after April 1, 1999 but construction is not completed within 5 years from the end of the year in which capital was borrowed.

In the above situations only deduction upto Rs. 30,000 can be claimed.

Section 24 reproduced hereunder for your ready reference –

24. Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees :

Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within [five] years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed two lakh rupees.

Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal installments for the said previous year and for each of the four immediately succeeding previous years:

Provided also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

Explanation.—For the purposes of this proviso, the expression “new loan” means the whole or any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of repayment of such capital.

(Republished With Amendments)