Interest on Housing Loan: Points & Precautions

Interest on Housing Loan: Points & Precautions


Interest on Housing Loan:

Points & Precautions

During covid, the banks have given us an option to stop the repayment of the housing loan. The amount repayable during this period has been converted into another term loan account. My query is whether the interest not paid during the period of covid due to the new concession provided by the Government will be eligible for deduction while filing income tax returns? [minal*****]
One of the most common tax bonanzas for individual taxpayers is in the form of deduction towards “Interest on Housing Loan” admissible 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. There is lots of confusion as far as the deduction of interest on housing loans is concerned. Further, there are few interesting issues which taxpayers are engrossed with while claiming deduction towards interest on housing loans. Let us have a look at some of these issues:
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 an accrual basis.
Deduction towards Interest not paid during the period of Covid
Taxpayers can claim deduction towards interest of the amount which has not been paid to the bank due to concessions announced by the Government during Covid-19. It may be noted that the interest is eligible for deduction on accrual basis and not on payment basis.
Interest paid on unpaid purchase price:
There are situations where the purchaser doesn’t pay the full amount of purchase to the seller but converts it into a loan. In some cases, the 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 on unpaid Interest:
Interest on housing loans is charged on a monthly basis by the bank. If the amount is not paid then interest is again charged on interest 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 loans from one bank to another bank to enjoy the benefit of lower interest rates. 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 loans. 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 the 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, the 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 a 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 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 to some person who can be treated as an agent in India of the recipient of interest.