TAX REBATE ON HOME LOAN INTEREST

The interest component of home loan repayment can be deducted from income while computing your tax liability, says Ashish Gupta
Under the Income Tax Act, interest on a home loan is tax deductible provided the specified conditions are complied with. The deduction is available while computing income under the head ‘Income from House Property'. Deduction on interest paid is available even if the house is not rented out and is either lying vacant or has been self-occupied.
The relevant provisions are contained under Section 24 of the Income Tax Act. The loan should be taken for construction, acquisition, repair or reconstruction of property. The main condition is the assessee should borrow the money for housing purposes. The interest should be payable on the borrowed capital.
For the purpose of computing income or loss under the head ‘Income from House Property' for a self-occupied house, a normal deduction of Rs 30,000 is allowed in respect of interest on borrowed capital. However, a deduction on interest up to a maximum limit of Rs 1.5 lakhs is available if the loan has been taken on or after April 1, 1999 to construct or buy a house. The construction or acquisition of the house should have been completed within three years from the end of the financial year in which the capital was borrowed.
This higher deduction is not allowed for interest on capital borrowed for the purposes of repairs or renovation of an existing house. To claim the higher deduction, the assessee should furnish a certificate from the bank on the capital borrowed, specifying the amount of interest payable, and the purpose - construction or acquisition.
The two essential conditions necessary for availing the higher deduction are the amount must have been borrowed on or after April 1, 1999 and the acquisition or construction of the house
must have been completed within three years from the end of the financial year in which the capital was borrowed. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the house could have commenced before April 1, 1999 too. As long as the construction or acquisition is completed within three years from the end of the financial year in which the capital was borrowed, the higher deduction is available. It is also to be noted that there is no stipulation regarding the construction or acquisition of the house being entirely financed by capital borrowed on or after April 1, 1999. A loan taken prior to April 1, 1999 will carry a deduction of interest up to Rs 30,000 only. However, in any case, the total amount of deduction of interest on borrowed capital cannot exceed Rs 1.5 lakhs in a year.
In case a property has been acquired or constructed with borrowed capital, the interest payable on the amount borrowed for the period prior to the previous year in which the property has been acquired or constructed is also eligible for deduction. The interest is deductible in five equal instalments commencing from the previous year in which the house has been acquired or constructed. The first instalment is deductible in the year in which the construction of the property is completed or the property is acquired. The balance four instalments are deductible in the four subsequent years.
The interest is allowed as a deduction on accrual basis i.e. on due basis. It is not necessary that it should have been actually been paid during the year. Under the Income Tax Act, only the person who has taken the loan can claim tax rebates.
Courtesy:- TOI dt:- 21/11/2009