Needless to say, one of the best tax management practices to reduce personal income tax liability, is to avail deduction of interest paid on housing loan.
We could find that it is the area in which much of doubts are raised by salaried class. These doubts are ranging right from the simple query such as “Where is the column to deduct the house loan interest in the income tax return?” to complicated on such as “Whether fair rent has to be shown if house property is self occupied and also not let out”.
The deduction of interest on housing loan while computing income tax provided under Section 24 of the Income Tax Act is widely mistaken as we think that this deduction is allowable straightly from one’s income. However, this deduction can not be made as such from the income, since a close reading of Section 22 to 27 of the Income Tax Act which govern “Income or Loss from House Property” would show that the deduction of interest paid on housing loan can be made only from the ‘annual value’ (Rental Income) in respect of house property owned.
In the case of a house for which the owner or co-owner want to avail the deduction at source for the interest paid on house loan, then the determination of ‘Annual Value’ is important in the context of taxation of income from House Property.
How to determine Annual Value?
The calculation annual value will be depending on whether the house property is self occupied by owner/co-owner or not.
Annual Value when House property is not self occupied:
In the case of house property is not self occupied the annual value that is derived based on the rent earned/fair rent receivable from the property. If the same is more than the deduction such as
(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)) and
(iii) Municipal taxes, then the differential amount will be the “Income on House property”.
If the above deductions are more than the Rent earned/fair rent receivable from the property, then the differential amount will be the “Loss on House Property”.
As far as the term “Fair Rent” is concerned, the provisions under Income Tax Act provide that it is the inherent rent earning capacity of the property, when it is let out. It is not necessary, that the property should be actually let.
Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value.
Where, however, the actual rent is less than the reasonable rent (e.g. in case where the tenancy is affected by close relationship or such other consideration), the latter will be annual value.
The municipal value of the property, the cost of construction, the standard rent if any under the Rent Control Act, the rent of similar properties in the same locality are relevant factors for the determination of the annual value.
However, if a property is let and was vacant during any part or whole of the year and due to such vacancy, the rent received is less than the notional rent, such lesser amount shall be the Annual Value.
Illustration: If the actual rent received is Rs. 18,000/- and municipal valuation is Rs.24,000/-, the annual value would be Rs. 24,000/- for the purpose of the Income-tax Act. Here, if the property was vacant for six months and the rent received is Rs. 18,000/- for six months the Annual Value shall be Rs. 18,000/-.
If House property is self occupied:
If the house property is self occupied, annual value will have to be calculated as nil and interest actually paid on borrowed capital can be deducted as “Loss on House Property”. The maximum amount of interest permissible in the case self occupied property is Rs.1,50,000 (in respect of funds borrowed after 01.04.1999)
Whether interest payable should have been actually in the assessment Year:
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) Interest on borrowing can be claimed as deduction only by the owner or co-owner, viz., person/persons who has/have acquired or constructed the property with borrowed fund.
(vii) In case of Central Government employees, interest on house building advance taken under the House Building Advance Rules would be deductible on the basis of accrual of interest which would start running from the date of drawal of advance.
Interest for Pre-construction period:
Money will be normally 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 construction is completed in April 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 installments of Rs. 18,000/- each starting from the assessment year 2002-03.
Annual Value of one house away from work place:
Income Tax Department has provided following illustration information booklet released in November-2010, in this scenario.
A person may own a house property, say in Bangalore, which he normally uses for his residence. He is transferred to Chennai where he does not own any house property and stays in a rental accommodation. In such case, the house property in Bangalore cannot be used for self-occupation and notional income therefor would normally have been chargeable although he derives no benefit from the property. To save the taxpayer from hardship in such situations, it has been specifically provided that the annual value of such a property would be taken to be nil subject to the following conditions:
- The assessee must be owner of only one house property.
- He is not able to occupy the house property because of his employment, business etc. being away from place where the property is situated.
- The property should not have been actually let.
- He has to reside at the place of employment in a building not belonging to him [Section 23(2)(b)].
- He does not derive any other benefit from the property not occupied.