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Housing Interest evokes Evergreen Interest!

Deduct Now, Pay Later, But Save Tax For Sure!

Deduction of interest on housing loan has been of evergreen interest for readers since it provide focus on valuable opportunities for income-tax saving. Replies to the following queries provide an interesting insight.

Tax Saving Even Without Actual Payment!

Query: I am desirous of investing in a house and need a housing loan of Rs.20,00,000.  An institutional loan would mean adhering to a strict schedule of interest and installment payments and hence I am considering the option of availing such loan at 8% interest per annum from my senior citizen father, who would have no objection in granting me accommodation in payments so as to suit my liquidity convenience.  Being in the top tax bracket, I would like to know if I can avail tax deductions for housing interest and installment payments, if they are not actually paid during the year, but deferred for payment in the later years as per my convenience.

Reply: Section 24(b), which provides for deduction of interest on housing loan refers to the term ‘interest payable’ and not ‘interest paid’. Since this deduction is available on ‘accrual basis’, you can claim the benefit of maximum interest deduction of 1,50,000 against the annual interest of Rs.1,60,000 (at 8% of the Rs.20,00,000) payable by you and save tax of Rs.46,350 (at 30.9%), though the interest is not actually paid by you during the year.

You will be required to obtain a certificate from your father from whom you have borrowed the capital specifying the amount of interest payable by you for the year.  Your father may also be well advised to show this interest income on accrual basis and being a senior citizen, he may be able to plan zero tax liability.

However, as regards the deduction for payment of installments of housing loan under Section 80C, the same is available only in respect of actual repayment and that too if the amount is borrowed from the government, bank, LIC, housing finance institution or an employer being a company, co-operative society, local authority, university or college. Repayment of housing loan installments from a private source, as in your case, is not eligible for deduction under Section 80C. You would, therefore, be required to plan other investment options for availing the benefit of this deduction.

Deduction on Switching of Housing Loan

Query: Two years ago, I had taken a housing loan of Rs.15,00,000 from LIC Housing Finance on which interest is payable at 11% per annum. My father who has just received his retirement benefits has offered to give me a loan at 9% per annum. If I plan to repay the old loan by taking a fresh loan from my father, can I continue to avail the benefit of deductions for interest paid?

Reply: Your plan of availing of the fresh housing loan at 9% per annum from your father and repaying the original loan at 11% per annum would indeed be smart planning. Alongwith a clear 2% saving on your interest payment, you will continue to enjoy the benefit of deduction even after the switching of loan. In this regard, you can usefully rely on the CBDT Circular No. 28 dated 20-8-1969, which clearly directs that where a fresh loan has been raised to repay the original housing loan, interest payable on the second loan, would also be allowed as a deduction under Section 24(b). Your father too, should be quite happy to get a decent return of 9% on the loan advanced to you. A win-win situation for both!

Housing Loan for Repairs and Extension

Query: I am residing in my house which was constructed a few years ago and the housing loan for which has been fully repaid. I am proposing to undertake some major repairs and extension of my present house. If I get a loan from my employer for the said purpose, can I get the benefit of any deduction in respect of interest paid thereof?

Reply: The common perception in regard to deductibility of interest paid on housing loan is that such loan should have been borrowed either for purchase or construction of a house. However, Section 24(b), which provides for deduction in respect of interest payable on borrowed capital, clearly states that such capital can be borrowed either for ‘acquisition, construction, repair, renewal or reconstruction of a house.’

In view of the above, you should have no difficulty in claiming the deduction of interest payable by you in respect of the loan taken for purposes of repairs and extension of your self occupied house. However, you should bear in mind that the amount of deduction in this regard shall be subject to the monetary ceiling of Rs.30,000, since the higher limit of Rs.1,50,000 is applicable only in respect of a new house purchased or constructed with borrowed capital.

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