Computation of Income from House property and deduction on home loan interest under section 24 of Income Tax Act, 1961
CONDITIONS NECESSARY FOR TAXING INCOME FROM HOUSE PROPERTY These are:
• The property should consist of any building or land appurtenant thereto
• The assessee should be the owner of the property
• The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.
Unless all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the head ‘Income from House property’.
|Gross annual value.|
Less: municipal tax paid by landlord during the year
Net annual value
Less: deduction u/s 24*
(a) standard deduction 30% of Net annual value
(b) interest on borrowed capital
Income from house property
|*Deduction is available on accrual basis.|
Other Permissible Deductions from Annual Value in cases of let out properties (Section 24)
The following deductions are permissible:
(i) deduction equal to 30% of the annual value, irrespective of any expenditure incurred by the taxpayer (S.24(a)). No other allowance for repairs, maintenance etc. would be allowable.
(ii) interest on borrowed capital (S. 24(b)) Interest on borrowed capital is allowable as deduction on accrual basis (even if account books are kept on cash basis) if capital is borrowed for the purpose of purchase, construction,repair, renewal or reconstruction of the house property.
The following aspects concerning claim for deduction of interest are to be kept in view:
(i) The interest is deductible on ‘payable’ basis i.e. on accrual basis. Hence it should be claimed on yearly basis even if no payment has been made during the year.
(ii) For claiming interest, it is not necessary that the lender should have a charge on the property for the principal amount or the interest amount.
(iii) In Shew Kissan Bhatter v. CIT (1973) 89 ITR 61 (SC) the Supreme Court has decided that interest payable for outstanding interest is not deductible.
(iv) Taxpayer cannot claim deduction for any brokerage or commission paid for arranging loan either as a one time arrangement or on periodical basis till the loan continues.
(v) In terms of circular No. 28 dated 20th August 1969, if an assessee takes a fresh loan to pay back the earlier loan, the interest on the fresh loan would be deductible.
(vi) Interest on borrowing can be claimed as deduction only by the person who has acquired or constructed the property with borrowed fund. It is not available to the successor to the property (if the successor has not utilized borrowed funds for acquisition, etc). In other
words, the relationship of borrower and lender must come into existence before it can be said that any amount or any other money is borrowed for the purpose of construction, acquisition, etc., of house property by one person from another and there must be real transaction of borrowing and lending in order to amount to any borrowing.
(vii) In case of Central Government employees, interest on house building advance taken under the House Building Advance Rules (Ministry of Works and Housing) would be deductible on the basis of accrual of interest which would start running from the date of drawal of advance. The interest that accrues in terms of rule 6 of the House Building Advance Rules is on the balances outstanding on the last day of each month – Circular No. 363, dated June 24, 1983.
(viii) Any interest chargeable under the Act, payable out of India on which tax has not been paid or deducted at source, and in respect of which there is no person in India who may be treated as an agent, is not deductible, by virtue of Section 25, in computing income chargeable under the head “Income from house property”.
Interest for pre-construction period
Money may be borrowed prior to the acquisition or construction of the property. In such a case, interest paid/ payable before the final completion of construction or acquisition of the property will be aggregated and allowed for five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction.
Example:- The assessee took a loan of Rs. 3,00,000/- in April, 1999 from a Bank for construction of a house on a piece of land which he owns at Meerut. The loan carried
interest @ 15% p.a. The construction is completed in April 2001 and the house is given on rent from May 2001. Meanwhile he has already incurred liability of interest of Rs. 90,000/- for F.Y. 1999-2000 and 2000-01. Because of the above provision, the assessee can claim a deduction in respect of this interest of Rs. 90,000/- (Over and above the yearly interest) in five equal instalments of Rs. 18,000/- each starting from the assessment year 2002-03.