Deduction on Home Loan Interest Only After Construction is Over...

Ms. Parizad Sirwalla, Chartered Accountant

The entire interest on housing loan can be claimed as deduction against the net rental value

My wife & I jointly booked a one - bedroom house for investment purpose. The present rate is Rs.7,100 per square feet. I have to make the first payment of 30 % of the total cumulative value by February end 2014. What will be the income tax implications for this kind of property? Also, let me know the tax benefits the two of us can enjoy on this?

- Mr. Abhijit Sarkar

Reply by Ms. Parizad Sirwalla, Chartered Accountant

 

Parizad Sirwalla, Chartered Accountant, KPMG

I understand that the property is still under construction. Accordingly, there would not be any immediate tax implications in your or /  your wife’s hands.

If you & your wife have availed any housing loan for acquisition of the aforesaid property, you can claim the tax benefit in respect of interest & principal repayment.

Both of you can claim deductions towards interest on housing loan only once the construction of the property is completed. The pre-construction interest paid for the period prior to the fiscal in which the construction of the property is completed shall be deductible in 5 equal annual instalments commencing from the fiscal in which the construction of the property has been completed.

Accordingly, the deduction towards aggregate interest (including one-fifth of pre-construction interest) can be claimed from the fiscal in which the construction of the property has been completed.

With respect to tax deduction on the principal portion, while there is an ambiguity on whether the property should be constructed to claim the same under section 80C, a view may be possible to claim it when the property is under construction.

This deduction shall be subject to an overall limit of Rs.1 lakh per fiscal. The deduction of interest and principal repayment by each of you as Income tax payers would be available in the ratio of the amount funded.

Since both of you are acquiring the property for investment purpose, it is assumed that both of you will not self-occupy this property.

Accordingly, once the construction of the property is completed and possession has been taken, the property may be let out or kept vacant. In case the property is vacant, it will be considered as “deemed to be let out”. Hence, deemed rental will have to be computed for taxation purpose.

Accordingly, the actual / deemed rental will have to be offered to tax. The deduction towards actual municipal taxes paid and standard deduction of flat 30 % (after deduction of municipal taxes) towards repairs & maintenance charges against the actual / deemed rent can be claimed.

Further, the entire interest on loan can be claimed as deduction against the net rental value. The balance rent amount, if any, will be taxable for both of you under the head “income from house property” in the proportion of investment in the property.

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