Sunday, March 10, 2013

House loan Interest u/s 24(b), repayment(80C) deduction if construction not completed ?


on Sunday, March 10, 2013

We have asked a Question On Simple Tax India Face Book Page ,regarding house loan benefit on under constructed house. The question is reproduced here under

"House is not completed by 31.03.2013 ,whether benefit of house loan under following sections can be claimed in Financial year 2012-13 as per income tax act /rules. 

  1. 24(b) (Interest ) 
  2. 80 C (repayment of House loan principal )
Option were
A) Both Yes    B) Both No     C) 1 yes 2 No    D) 1 No 2 Yes.

Quiz results : Answer given by participant shows that ,there is confusion in general public about the correct answer. 
  1. 42% person has selected answer B , i.e House loan interest and loan repayment,both, can not be claimed if house construction is not completed before end of previous year .
  2. 38% person has selected answer D , i.e House loan interest can not be claimed but house loan repayment benefit can be claimed even if house construction is not completed before end of previous year.
  3. 12%  person has selected answer A , i e House loan interest and Loan repayment,both, benefit can be claimed even house is not completed before end of previous year.
  4. 8%   person has selected answer C , i.e house loan interest can be claimed but loan repayment benefit can not be claimed if house is not completed before end of previous year.
What is correct answer according to you ? . Lets discuss these issue with relevant provisions of Income tax act/rules in details .

1. Interest of House loan ,if house is not completed by end of previous year [section 24 (b)] : Interest on house loan is allowed under section 24(b) ,so relevant part of section 24(b) reproduced here under.
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.
As per Explanation given to section 24(b) ,Deduction of House loan interest payable by the assessee in  previous year in which such property has been acquired or constructed will be deducted in five equal annual installments,commencing from the previous year in which the house is acquired or constructed.

So pre-construction period interest is not allowed before completion of house.However pre-construction period is different from pre-Emi period.

Meaning of pre-construction period Interest as per section 24(b): Pre-construction period means the period commencing(started ) on the date of borrowing and ending March 31 ,immediately prior to the date of completion of construction /date of acquisition or date of repayment of loan , which ever is earlier.(read more details about pre-emi interest here)

Example: If Ram takes a loan of Rs 400000 for constructing a House on 10 May .2010. Construction of  house is completed on 25.02.2013. what is pre-construction period.

Solution :Pre-construction period start from date of loan to March 31,immediately prior to date of completion of construction. in above example house completed on 25.02.2013 ,so pre-construction period is 
  • 10.05.2010 to 31.03.2012
Suppose interest for above pre-construction period is Rs 70000, then it will be available for deduction in 5 equal installments of 14000 each , from Financial year 2012-13 to 2016-17.

Correct answer : So there are clear cut provisions about how to claim pre-construction period interest of House loan and it can not be claimed till completion of House .As per quiz result also , 80% (42+38) person have also selected the correct answer that Interest on house loan can not be claimed in previous year , if house is under construction before the end of previous year.

2.Deduction of repayment of House loan, if house is not completed by the end of previous year [Section 80C]: Relevant part of section is reproduced here under.

(xviii) for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head "Income from house property" (or which would, if it had not been used for the assessee's own residence, have been chargeable to tax under that head), where such payments are made towards or by way of (installment of house loan)  "
As per above section, deduction of repayment of house is available only if house income is taxable under "Income from house property " Further department has issued a clarification circular 498 dated 04.11.1987 that deduction under section 80C for repayment of house loan paid in a previous year can only be claimed if house construction is completed before the end of previous year.

Complete circular is given below
  Circular : No. 498 [F. No. 275/111/87-IT(B)], dated 4-11-1987.

Repayment of loans, etc., taken for purchase/construction of house - Whether deduction admissible under sub-clause (ii) of clause (b) of sub-section (2) where construction of house is still continuing during previous year relevant to assessment year 1988-89

1. I am directed to refer to para 4(8)(e)(ii) of this Department’s Circular No. 489 [F. No. 275/51/87-IT(B)], dated 25-6-1987 [see under section 192] wherein the incentives provided under section 80C to the income-tax payers in respect of housing loans, etc., taken from specified institutions have been explained.

2. References have been received from some quarters enquiring whether the repayment of loans taken for the purchase or construction of a new residential house property, the construction of which is still continuing would qualify for deduction under section 80C.
3. According to the provisions of sub-clause (ii) of clause (h) of sub-section (2) of section 80C, in computing the total income of an assessee, a deduction shall be allowed for any sum paid towards the purchase or construction of a residential house property subject to the fulfilment of the conditions laid down therein. For the admissibility of this deduction, the construction of the house property should be completed after 31-3-1987 and the income from the same should be chargeable to tax under the head ‘Income from house property’ in the relevant assessment year. For the guidance of Drawing and Disbursing Officers and other persons responsible for the payment of income chargeable under the head ‘Salaries’, it is clarified that in a case where the construction of the property does not get completed by the end of the previous year relevant to the assessment year 1988-89, no deduction under this provision shall be admissible to the assessee in the assessment of his income for this assessment year. This aspect may please be kept in mind while deducting the tax at source under section 192 in the financial year 1987-88.
The above circular was issued before the insertion of new section 80C but wording of the old and new section remain the same ,so this is applicable in present scenario also . 

Correct answer : is that if house is not completed before end of previous year then you can not claim deduction under section 80C for repayment of House loan in previous year.Only 50 % persons get it right (42+8).Further worst is that unlike interest on house loan you can not claim pre-construction house loan repayment in future years also.(read more about House loan and section 80C )

Conclusion: Correct answer is "B" that both of above benefit can not be claimed for under constructed house and most of Public know this fact regarding interest but confused about house loan repayment . 

Positive side of the above discussion is that ,if your house is under construction and you wants to claim deduction in Financial year 2012-13, under section 
  1. 80C (repayment of house loan) and 
  2. 24(b) (Interest on house loan )
then work hard and complete the house before 31.03.2013 ,and claim following deduction in financial year 2012-13
  • House loan repayment deduction u/s 80C  for complete financial year 2012-13. and 
  • Interest on house loan 
    • one fifth of pre-construction period interest i.e 1/5 of interest up to 31.03.12 and 
    • Complete interest of Fy 2012-13.
Further if your house is not completed before 31.03.2013 then you will not able to claim house loan benefit in Financial year 2012-13.
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  1. Please clarify:If I have not show "INCOME FROM SELF-OCCUPIED PROPERTY" in the last 5 years as ZERO will it be "FAULTY" to the extent I will have to file REVISED IT RETURNS even though prior to last 5 years I have disclosed "INCOME FROM HOUSE PROPERTY" as ZERO?

    ReplyDelete
    Replies
    1. nil income is not required to shown , even 100% of house owner is not showing the same .

      Delete
  2. thanks friends for sharing this valuable knowledge

    ReplyDelete
  3. I am selling an under construction Flat at a profit of 10 Lakh. The profit falls under Short Term Capital gain as it has not completed 3 yrs. I have paid 3 lakh as interest on the Home Loan taken for this property.

    Is this interest amount deductible from the Total Profit and Taxable Income will be 7 Lakh??

    ReplyDelete
    Replies
    1. not deductible.. deductible only if u r a dealer in property

      Delete
  4. I Have the following query:-
    If Mr. A purchases a house rs 30 lakhs (inclusive of stamp duty and other charges) and he is having only salary income which falls in 30 % slab. The construction of house would be completed in 2.5 years from now i.e around in February,2016. So what deductions can he claim as per the above provisions? And also I want to know about the benefits of purchasing a house in a joint ownership with reference to the above sections.

    ReplyDelete
    Replies
    1. In current year ,No deduction can be claimed .As given above deduction can be claimed from year of completion only

      Delete