If you have taken a loan in respect of a house then apart from the house you own, you may be eligible for certain tax deductions and resultantly pay less income tax. Income-tax Act allows deduction for interest on housing loan paid by you (as an individual, not an entity). This deduction of interest acts as a benefit and is available for every housing loan taken for purchase, construction, renovation or reconstruction of a residential house. The deduction for interest is allowed on accrual basis i.e. even if interest has not been paid during the year.
Is a loan taken from friend eligible for tax deduction?
Although, banks and housing finance companies generally provide housing loan or loan against property, but if loan has been taken from relative or friends, the deduction under Income-tax is allowed for the interest paid on such borrowings. The deduction is available even if personal loan is used for construction or purchase of a residential house.
In nutshell, irrespective of source of funds (bank or friends), the interest paid on borrowing, used for purchase, construction, renovation or reconstruction of a residential house, shall be considered for income tax deduction.
How much deduction is allowed in Income-tax?
The quantum of deduction benefit shall depend on the purpose for which house has been occupied – i.e. house occupied for own use or house is rented out to others.
House used for own
1. If loan was taken on or after April 1, 1999
If housing loan was taken to construct, repair or purchase a house property on or after April 1, 1999 and such construction or purchase is completed within 5 years from end of the year in which such loan was taken then, the deduction to be allowed shall be lower of actual interest paid (or payable) or Rs. 2,00,000.
Earlier the taxpayer had the option to claim only the one house property as self-occupied. From Financial Year 2019-20, the assessee can claim nil annual value in respect of any two houses declared as self-occupied. In other words, a taxpayer can now claim that he has two self-occupied house properties. Consequently, a deduction with respect to interest on borrowed capital can be claimed with respect to both the houses. However, the aggregate monetary limit for the deduction would remain the same, i.e., Rs. 2,00,000.
If such construction or purchase is not completed within 5 years then the deduction to be allowed shall be lower of Rs. 30,000 or actual interest paid (or payable).
2. If loan was taken before April 01, 1999
If housing loan was taken before April 1, 1999 to construct or purchase a property then the deduction to be allowed shall be lower of Rs. 30,000 or actual interest paid.
The details about the interest paid or payable on housing loan can be determined on basis of certificate issued by the bank or the financial institution. The principal repayment of housing loan shall also be eligible for deduction under Section 80C.
House rented out
The entire amount of interest paid or payable during the year, on the housing loan taken for a rented-out property, is allowed as tax deduction. If interest on housing loan is more than 70% of rental income then the difference between the two shall be considered as ‘loss from house property’. This loss can be adjusted against any other income taxable during the year and hence can reduce the tax liability. However, a maximum loss of Rs. 2 lakhs can be adjusted against any other income and the remaining loss shall be carried forward, which can be adjusted against rental income earned in future years.
Example, an individual earned Rs. 3 lakhs rental income from his house property and he paid Rs. 5.5 lakhs as interest on housing loan. In that case, the loss from house property shall be Rs. 3.4 lakhs (Rs. 5.5 lakhs less 70% of Rs 3 lakhs). Out of total loss of Rs 3.4 lakhs, an individual can adjust loss of Rs. 2 lakhs against any other income in the current year and the remaining Rs. 140,000 shall be carried forward to the subsequent year.
Additional deduction on purchase of first house (under Section 80EE)
Apart from the deductions mentioned above, an additional deduction is allowed to an individual who is buying or construction his first house if he takes a housing loan during the year 2016-17. Such deduction is allowed if the loan amount does not exceed Rs. 35 lakhs and value of house does not exceed Rs. 50 lakhs [see details in Section 80EE].
What if amount was borrowed before construction of house?
The period from the date on which amount is borrowed until construction of the house is completed is called ‘pre-construction period’. The deduction for interest of pre-construction period is allowed only if the construction of house property is completed. This deduction is allowed as per the following provisions.
If possession of house is obtained before loan repayment
Interest on housing loan for the period (from date of borrowing of loan till the date of housing construction or acquisition) is allowed as deduction in 5 equal annual installments. The first installment will be allowed as deduction from the year in which property is constructed or acquired.
For example, loan is taken on June 1, 2017 and house construction is completed on August 31, 2019. The interest for the period June 1, 2017 to March 31, 2019 is Rs. 500,000. This shall be allowed in five equal annual installments of Rs. 100,000 [Rs. 500,000/5] starting from the year 2019-20.
If loan is repaid before obtaining possession of house
If loan is repaid before finalization of construction or purchase of property then the entire interest will be treated as interest of pre-construction period. The interest will be allowed as deduction in 5 equal annual installments starting from the year in which property is constructed or acquired.
For example, the loan is taken on June 1, 2017 and construction is completed on August 31, 2019. Presume that the entire loan was repaid on June 1, 2018. The interest for the period June 1, 2018 to May 31, 2018 will be allowed in five equal annual installments. The first installment will be allowed in the financial year 2019-20.
Frequently Asked Questions
Q. Joint Ownership of Property – Is deduction allowed to both the co-owners?
Yes, the deduction for interest is allowed to all the co-owners in the house property in their respective share in the property. However, such deduction shall be allowed if co-owner actually pays for the interest from his own source of income.
For example, if an individual assessee buys a property in joint ownership with his wife, but the wife does not pay any interest on housing loan. In such a situation, no deduction for interest shall be allowed to the wife.
Q. Do I need to furnish any document to claim deduction?
The deduction up to Rs. 2 lakhs will be admissible only if individual obtains a certificate from the lender specifying the amount of interest payable. If an individual does not obtain such certificate, the deduction shall be limited to lower of Rs. 30,000 or actual interest paid.
Q. Interest on overdue payment – Is interest for overdue payments allowed?
No, any interest or penalty paid on outstanding interest is not allowed as deduction. This is so because this interest is paid for delayed payment of the installments and is not for the acquisition of a house.
Q. Loan processing fees – Is loan processing fees allowed as deduction?
No, any brokerage or commission paid for arranging loan is not eligible for income-tax deduction.
Q. Foreclosure charges – Is foreclosure charges allowed as deduction?
Yes, foreclosure or pre-payment charges for foreclosing housing loan is allowable as deduction.
Q. Interest on the restructuring of loans – Is new housing loan taken to repay existing loan allowed as a deduction?
Yes, interest paid on restructured loan (say, second loan or loan taken over by one bank from another, or modifying the loan terms, etc. ) taken only to repay the original housing loan (taken specifically for purpose of acquiring or constructing a residential house) is eligible for income-tax deduction. However, if loan taken is not utilized for construction, purchase or acquisition of house property, income-tax deduction shall not be allowed.
Q. Can I claim deduction if I just contribute in repayment of loan?
The deduction for interest on housing loan can only be claimed by an individual who himself has taken the loan for acquisition or construction of house property. The successor is not eligible to claim deduction of interest if he has not borrowed funds to acquire or construct a property.
Q. EMI to the seller – Is deduction allowed for interest paid to the seller for deferred payments?
If buyer of house makes an arrangement with seller to pay price of property in deferred installments with interest then unpaid price will be treated as amount borrowed and interest paid or payable thereon will be allowed as deduction.
Q. Is Interest on loan taken to repay the original borrowing eligible for the deduction?
If a fresh loan has been raised to repay the original loan taken for the aforesaid purpose, the interest payable in respect of the second loan is also admissible as deduction.
Q. Is deduction allowed for interest payable outside India?
If interest is payable outside India and it is chargeable to tax in India in the hands of recipient then no deduction shall be allowed for such interest unless TDS from such payment has been deducted and deposited with the Govt.
Q. How much interest deduction is available if the developer did not deliver the house within 5 years?
If housing loan was taken to purchase a house property (for own residence), the deduction for interest shall be limited to Rs. 200,000. Such deduction is allowed subject to a condition that the purchase of house should be completed within 5 years. If such purchase is not completed within 5 years then the deduction shall be up to Rs. 30,000.
If the developer did not hand-over the possession within 5 years, then you can plan your tax by letting out the property in the year in which its possession is obtained. In that situation, the deduction of interest shall not be limited to Rs. 30,000.