Whether deduction towards housing loan interest is available on accrual basis or deduction is available only if it is paid ?

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Query :

Whether deduction towards housing loan interest is available on accrual basis or deduction is available only if it is paid ?
Opinion:

One of the biggest tax bonanzas for individual taxpayers is in the form of deduction towards interest on housing loan available u/s 24(b) of the Income Tax Act – 1961. Deduction is restricted to Rs. 2 Lakh for self occupied house property. For let out and deemed let out property, deduction is again restricted to Rs. 2 Lakh but the benefit of carry forward is available in case of such interest. Let us have a look at some of the interesting issues while claiming deduction towards interest of housing loan. By the finance Act -2019 , an additional deduction u/s 80EEA of Rs. 1.50 Lakh is proposed over and above the liMit specified above u/s 24(b).

Deduction on due basis & not on actual payment basis:

Deduction towards housing loan Interest is available on accrual basis i.e., due basis. Even if the interest is not paid during the year, still the deduction would be admissible. While computing the amount of deduction, one needs to be careful & should claim the deduction on accrual basis.

Interest on unpaid Interest:

Interest on housing loan is charged on monthly basis by the bank and if the amount is not paid then interest is again charged on interest debited of earlier month debited to loan A/c. Deduction u/s 24(b) is available only on borrowed capital. Interest paid on such unpaid interest is not deductible as it is not “Interest on borrowed capital”. This was held by Apex Court in Shew Kissen Bhatter Vs. CIT (1973) 89 ITR 61.

Commission / processing fees:

Any amount of brokerage & commission paid for arranging the loan or processing fees / stamp duty charges paid for mortgage is not eligible for deduction.

Takeover of Loan:

Very often, taxpayers shift housing loan from one bank to another bank to enjoy the benefit of lower interest rate. In such cases,

  1. If the housing loan account is shifted from one bank to another bank then also the benefit of deduction can be claimed by taxpayers on new loan. CBDT vide circular No. 28 Dated 20.08.1969 has clarified that interest on fresh loan taken to repay the original loan is allowable as deduction.
  2. Prepayment penalty paid at the time of takeover (or prepayment penalty paid for closing the loan at any time) is not admissible as deduction.
  3. If the loan amount is shifted from one bank to another for availing some additional top-up loan for business/ personal purposes then deduction will be restricted to the extent of amount of original loan only. For example, a person has availed a housing loan of Rs. 40 Lakh in 2014 & amount outstanding as on 30.04.2019 is Rs. 30 Lakh. Now, taxpayer shifts the loan to some other bank to avail an additional top-up term loan of Rs. 20 Lakh for business i.e., total loan sanctioned by the new bank is Rs. 50 Lakh. In such case, out of total loan of Rs. 50 Lakh, Rs. 30 Lakh can be treated as housing loan & Rs. 20 Lakh as business loan. Interest u/s 24(b) shall be restricted to 60% (i.e., in ratio of 3:2) of the total loan amount in such case.

Interest paid on unpaid purchase price:

There are situations where the purchaser don’t pay full amount of purchase to the seller but converts it in to loan. In some cases, purchaser purchases the property in installment. In such cases, unpaid price can be treated as borrowed capital. Interest paid on unpaid purchase consideration is also eligible for deduction u/s 24(b). [CIT Vs. Sunilkumar Sharma (2002) 254 ITR 103 (P & H)]

Interest on Mortgage Loan:

Deduction u/s 24(b) is available only if the loan is utilized for purchase, construction, repairs etc of the house property. If the purpose of the loan is one which specified u/s 24(b) then deduction will be available even if the loan is titled as ‘Mortgage loan’. Similarly, if the purpose of loan is not one specified in section 24(b) then no deduction would be available even if the loan is titled as ‘Housing Loan’.

Interest paid outside India:

Interest payable outside India will also be eligible for deduction u/s 24(b) provided that interest is paid after deduction of tax at Source (TDS) or is paid some person who can be treated as an agent in India of the recipient of interest.

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