Discover the nuances of claiming deductions under Section 24(b) of the Income Tax Act for pre-construction interest on home loans. This article breaks down the relevant clause and provides clarity through an illustrative example.
Ever thought of buying your “dream home” in an under construction building? Do you know what section 24(b) of Income Act has to say for pre construction interest on the loan which you are planning to borrow? Let us try to understand the correct time to claim deduction under this section with the help of relevant clause of the act and an example:
Extract of Relevant Section 24 of Income Tax Act, 1961
Deductions from income from house property.
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 or, as the case may be, the aggregate of 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 or, as the case may be, the aggregate of the amounts 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 instalments 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:
Provided also that the aggregate of the amounts of deduction under the first and second provisos shall not exceed two lakh rupees.
Suppose Mr. Ram agrees to buy a flat in under construction building in the year 2020 with the promise that he will get possession of the said flat in 2022 when the construction of the property will be completed.
Mr Ram took a housing loan from bank for 90% of the loan amount and as per slab completion, he gets loan amount disbursements and starts incurring interest expenses on the amount of loan disbursed.
Analysing this situation Mr. Ram cannot claim deduction for interest amount under section 24(b) when the construction is still going on. Mr. Ram can claim deduction u/s 24(b) in 5 equal instalments from the previous year till 4 succeeding previous years from the date when the OC is issued and he gets possession of his flat.
It is crucial to note that the OC is issued only once the building has been completed in all respects and can be occupied.
Thus the words “completion of construction” can be interpreted as completion of construction of the whole building in all respects and not just the flat which Mr. Ram has purchased.
But what if it takes longer than 5 years for construction of the property?
In such a case Mr. Ram can still claim deduction but only upto Rs. 30,000 from the end of the 5th previous year and once the construction gets completed Mr. Ram can claim deduction of 1/5th of interest not claimed as deduction under this section which will be restricted to Rs. 2 lakh.
Hence it is clear that if you are planning to save your taxes by claiming Section 24(b) deduction then it is always advisable to invest in ready to move or constructed flat rather than an under construction property.
* With effect from Assessment Year 2020-21, deduction for interest paid or payable on borrowed capital shall be allowed in respect of two self-occupied house properties.
However, the aggregate amount of deduction under this provision shall remain same i.e., Rs. 30,000 or Rs. 2,00,000, as the case may be.
Conclusion: Understanding Section 24(b) of the IT Act is crucial for individuals planning to invest in under-construction properties. By delving into the provisions and offering a practical example, this article aims to guide taxpayers on the correct timing and limitations of claiming deductions on pre-construction interest. Make informed decisions to optimize tax benefits.