There is no such requirement prescribed under Section 24 that the loan should be from a bank or financial company.
If the taxpayer has more than one house for his own residential purpose, only one house is treated as self-occupied.
Housing loan is one of the most widely used and most effective instruments to save tax. With lending rates at reasonable levels and new lenders offering competitive products, it makes sense to invest in property and avail tax benefits.
HOME SWEET HOME
If a taxpayer has taken a housing loan for purchase, construction, repair or reconstruction of a house, the interest on the loan amount can be deducted from his taxable income. It had remained stagnant at Rs1.5 lakh for almost fifteen years, but the Finance Act, 2014 raised the limit to Rs2 lakh with effect from financial year 2014-15, and is relevant to assessment year 2015-16.
It would be good to keep the following points in mind while availing of this:
* As the deduction is available on ‘accrual basis’, it can be claimed annually, even if the interest is not actually paid during the year.
* As per the instruction of the Central Board of Direct Taxes, interest paid on a new loan which is taken to repay an old housing loan is also eligible for deduction.
* As per another CBDT instruction, for Central government employees, interest on house building advance taken under the Housing Building Advance Rules is deductible on the basis of accrual of interest which would start from the date of withdrawal of advance, although the actual liability of payment of the same would be in the future.
* Interest payable by a taxpayer on a housing loan which is pertaining to the period prior to the financial year in which the house was bought or constructed is also eligible for deduction in five equal annual instalments, commencing from the financial year in which the house is acquired.
PROPERTY DEFICIT ELIGIBLE FOR SET-OFF AGAINST OTHER INCOME
In the case of a self-occupied house, since the annual value of the house is treated as ‘nil', the entire amount of interest payable on the housing loan would represent the amount of loss or deficit, which would be eligible for set-off against other income of the taxpayer.
The good news for salaried taxpayers is that a specific provision has been made to the effect that interest on housing loan is allowed as an adjustment against the taxable salary for determining the tax to be deducted at source under Section 192 of the Income-Tax Act.
DEDUCTION UNDER SECTION 80C
Section 80C of the Income-Tax Act provides for deduction on specified investments and allocations within the overall limit of Rs1,50,000. Payment of any instalment of a housing loan taken from specified agencies qualifies for this.
Thus, while the interest on housing loan is deductible up to Rs2,00,000 in the computation of total income, a separate deduction of up to Rs1,50,000 out of the gross total income can be availed of on the principal payment of loan instalment. The cumulative effect of tax saving on account of the above can be understood from the following illustration:
Manish Shukla has a taxable salary income of Rs15,00,000. His income tax for FY 2015-16 works out to Rs2,83,250. However, he has a housing loan of Rs20,00,000, and has paid Rs2,00,000 as interest (at 10 per cent) and repaid a loan instalment of Rs1,50,000. After considering these deductions, his net taxable income would be Rs11,50,000, on which the income tax payable would be Rs1,75,100.
Thus, the tax saving available to Shukla on his housing loan interest and repayment would be Rs 1,08,150.
TWICE THE GAIN
Take the case Avinash Varma and his wife, Arthi. Both are working in a private sector company and their annual taxable income is more than Rs10,00,000 each. They want to buy a house and are planning to borrow Rs40,00,000. They can get a loan at 10 per cent annual interest.
Since both the Varmas are earning, attracting the highest tax bracket, it makes sense to avail of the housing loan jointly. Under Section 24 of the income-tax act, for a residential house purchased or constructed, the deduction for interest on housing loan is up to Rs2,00,000. In the Varmas' case, for a loan of Rs40,00,000, they would be required to pay Rs4,00,000 annually as interest. If they take a joint loan in equal proportions, both can claim full deduction of Rs2,00,000 each. By doing that, they would effectively save income-tax of Rs61,800 each (at 30.9 per cent).
Also, on repayment of the principal amount of housing loan, both of them would be eligible for claiming deduction under Section 80C, within the limit of Rs1,50,000 each. Accordingly, they could save further income tax of up to Rs46,350 each.
HRA EXEMPTION & DEDUCTION OF INTEREST
Mohan Patel's basic salary and DA amount to Rs3,00,000 a year. He owns a house in Rajkot, which is lying vacant because he works in Baroda. He is staying at a rented house in Baroda and he pays Rs72,000 for it. He receives house rent allowance (HRA) of Rs40,000. Can Patel avail of the benefit of deduction for Rs60,000 a year on the interest paid by him on the housing loan for the house at Rajkot? Can he also claim the benefit of exemption in HRA despite being the owner of a house?
He can claim both. According to Section 23(3) read with proviso to Section 24, if a house cannot be occupied by the owner owing to his employment, business or profession, and no other benefit is derived by him from his own house, he can avail of the deduction for interest on housing loan.
Section 10(13A) prohibits exemption for HRA if a residential accommodation is owned and occupied by the assessee. However, in the case of Patel, since he does not live in the Rajkot house and pays rent for the Baroda house, the above restriction will not come in his way.
HOUSING LOAN FROM A PRIVATE SOURCE
Mumbaikar Keshav Ram plans to invest Rs 20,00,000 in an apartment. He has savings of Rs 5,00,000 and hopes to borrow Rs 15,00,000. A family friend is willing to lend the amount at a concessional rate of interest of 5 per cent a year. Ram is under the impression that to avail of interest deduction, he should take a housing loan from an approved housing finance institution or a bank. Can he claim the benefit for a loan from a private source?
There is no such requirement prescribed under Section 24 that the loan should be from a bank or financial company. In the case of Ram, the interest payable by him on the loan obtained from his family friend should be eligible for deduction out of his taxable income.
However, the benefit of deduction under Section 80C of the Income Tax Act on repayment of housing loan is available only if the loan is from Central or state government, a bank, LIC, National Housing Bank, a housing finance company or cooperative society and the employer of the taxpayer, being a public company, university, college, local authority or cooperative society. So Ram will not be entitled to the benefit of deduction under Section 80C.
KEEP IT WITHIN THE FAMILY
Payment of house rent and interest on housing loan within the family carry valuable opportunities for income-tax saving.
Take the case of Yasir Mohammed. He wants to invest in a house and needs a loan of Rs25,00,000. An institutional loan would mean adhering to a strict schedule of interest and instalment payments and hence he is considering getting it from his father at 8 per cent. The father, a senior citizen, has no objection in getting the payments according to Mohammed's liquidity convenience. Being in the top tax bracket, he wanted to know if he could avail of tax deductions for housing interest and instalment payments if they are not actually paid during the year but deferred for later years.
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’, Mohammed can claim the benefit of interest deduction of Rs2,00,000 (at 8 per cent of the Rs25,00,000) and save tax of Rs61,800 (at 30.9 per cent), though the interest is not actually paid by him during the year. He will be required to furnish a certificate from his father from whom he has borrowed the capital specifying the amount of interest payable by him for the year. His father may also be well advised to show this interest income on accrual basis.
However, the deduction under Section 80C is not available in this case as repayment of housing loan from a private source is not eligible for deduction under this section.
TAX BONANZAS FOR PROPERTY INCOME
Under the Income Tax Act, ‘Income from house property’ is a separate head of income, under which the ‘annual value’ of a property of which the taxpayer is ‘the owner’ is chargeable to tax. However, if a house is occupied by the taxpayer for the purposes of his business or profession, the value of such property is not chargeable to income tax.
ANNUAL VALUE OF A HOUSE PROPERTY
The income from a house for purposes of income tax is based on the ‘annual value’ of the property. The concept of annual value, in effect, is not a real but a notional concept. It is defined as ‘the sum for which the property might reasonably be expected to let from year to year.’ For purposes of computation of income under this head, house properties have been classified into the following two categories: self-occupied property (SOP) and let-out property (LOP).
SPECIAL CONCESSION FOR ONE SELF-OCCUPIED PROPERTY
A special concession is offered in case a taxpayer owns only one house and it is occupied by him under Section 23(2)(a). The annual value of such a house is taken as ‘Nil,’. In the case of such a house, interest on capital borrowed for its purchase or construction is deductible up to Rs2,00,000. No other deductions are available in such a case, where the annual value is taken at ‘Nil.’
If the owner has only one house, which cannot actually be occupied by him because of his employment, business or profession at another place, the annual value of such a house is taken to be ‘Nil’ under Section 23(2)(b), provided no other benefit is derived from the house by the owner. No deductions, other than interest on borrowed capital under Section 24(b), are available for such a property.
ANNUAL VALUE OF MORE THAN ONE HOUSE
If the taxpayer has more than one house for his own residential purpose, only one house (of his choice) is treated as self-occupied for computation of annual value, and all other houses will be ‘deemed to be let out’. In the case of such properties which are deemed to be let out, the computation of annual value is required to be done as in the case of a let-out property.
COMPUTATION OF INCOME FROM A LET-OUT PROPERTY
The annual value of a let-out property is determined on the basis of the following:
* The fair rental value of the property, not exceeding the standard rent determined or determinable under the relevant Rent Control Act.
* Actual rent received or receivable, if such amount is higher than the fair rental value.
* If the property has remained vacant for whole or part of the year, the rent received or receivable is less than the fair rental value, such lesser amount.
From the gross annual value as computed above, municipal taxes (including service taxes such as education cess and water tax) levied by any local authority in respect of the house property are required to be deducted if they are paid by the owner. The amount left after deduction of municipal taxes is known as the net annual value.
From the net annual value, the relevant deductions as available under Section 24 are to be deducted. As per Section 24, the following two deductions are allowed from the net annual value for the purposes of computing the taxable income under the head ‘Income from house property’.
Standard deduction: A composite standard deduction of 30 per cent of the net annual value. This deduction effectively replaces the earlier deductions for repairs and collection charges, insurance premium, annual charge, ground rent and land revenue, which were separately available until Assessment Year 2000-01.
Interest on borrowed capital: Interest payable on borrowed capital is allowed as a deduction, if the capital is borrowed for the purpose of purchase, construction, repair, renewal, or reconstruction of the house.
The interest payable by a taxpayer on funds borrowed for the acquisition or construction of a house and pertaining to the period prior to the year in which the property was acquired, is allowed as a deduction in five equal annual instalments. It must also be borne in mind that as per CBDT’s Circular No 28, the interest on a fresh loan, taken to repay the original loan raised for the above purpose, is also allowable as deduction. However, interest on unpaid interest is not deductible.
Tax concessions for rental income
Investment in house properties, whether residential or commercial, can derive reasonable rental income and valuable tax savings. Kamalesh Sharma bought an apartment for Rs30,00,000. He earns a monthly rent of Rs25,000. The municipal taxes are paid by the tenant. In this case, the annual value (AV) of the let-out property (LOP) is Rs3,00,000. However, considering the standard deduction of Rs90,000 (at 30 per cent of the AV), the taxable income from the property will be Rs2,10,000.
If Sharma is in the tax bracket of 30.9 per cent, the income tax on the taxable rent would be 164,890. Considering the benefit of standard deduction, the effective rate of tax would work out to a much lower 21.63 per cent, a significant saving.
Take the case of Mahesh Reddy, who has a commercial building which cost him Rs75,00,000. He spent Rs45,00,000 from his own pocket and borrowed Rs30,00,000 at 12 per cent a year. He lets out the property at an annual rent of Rs20,00,000 and pays an annual property tax of Rs5,00,000. In this case, the AV will be determined at Rs15,00,000 after deducting the property tax from the rent received. Considering the standard deduction of Rs4,50,000 (at 30 per cent of 15,00,000) and Interest Payable on borrowed capital of Rs3,60,000 (at 12 per cent of 30,00,000), the net taxable income will be Rs6,90,000. If Reddy is in the tax bracket of 30.9 per cent, the income-tax thereon will work out to Rs2,13,210.
Keeping in view both the deductions, the income-tax of Rs2,13,210 on the liquid income of Rs11,40,000 (after deducting interest of Rs3,60,000 and property tax of Rs5,00,000 from the rent of Rs20,00,000), effectively works out to just around 10.67 per cent of the rent and 18.70 per cent of the liquid income.
THE SECOND HOUSE
Can a taxpayer get tax benefits on his investment in a second house, when he is already getting it for the first?
The tax benefits that can be availed of on a housing loan can be broadly categorised under two heads. Firstly, interest paid on the housing loan, borrowed from any agency including a private source, is deductible under Section 24(b) while computing the income under the head ‘House Property’. Secondly, repayment of the principal amounts of a housing loan borrowed from specified sources is eligible for income-tax deduction under Section 80C of the Income-Tax Act.
In the case of a let-out house property, where the interest paid is eligible for set off against the rental income, there is no monetary ceiling for the maximum amount of interest that can be claimed as a deduction. However, in the case of one self-occupied house, whose annual value is treated as ‘Nil’, the maximum amount of interest that can be claimed as deduction is Rs2,00,000 a year.
TAX TREATMENT FOR SECOND HOUSE
The benefit of deduction in regard to interest on housing loan need not be restricted to one house; it is available in respect of every house owned by a taxpayer. However, if a taxpayer owns more than one self-occupied house, the special benefit of adopting the annual value of the house as ‘Nil’ would be available for one house of his choice, and the other houses, even if not let out, would be deemed as having been let out. The fair rental value of these houses will be taken as the annual value against which the interest paid can be deducted. Again, if such a house is deemed as let out, there is no monetary ceiling on the maximum amount of interest that can be claimed.
Moreover, in case of a house deemed to be let out, 30 per cent of the net annual value (which would be the fair rental value reduced by municipal taxes levied on the house) is further eligible as a standard deduction.
Take the case of Joseph Lobo, who purchased his first house in 2012 taking a loan of Rs20,00,000. He is required to pay an interest of Rs2,00,000 a year. In 2014, he purchases a second house, obtaining another housing loan of Rs30,00,000 on which he has to pay an interest of Rs3,00,000. The net annual value of the first house is Rs84,000 and that of the second house is Rs1,50,000. Both the houses are self-occupied.
In this case, for FY 2015-16, Lobo should show the second house as deemed to be let out and against the net annual value of Rs1,50,000, he should claim 30 per cent standard deduction of Rs45,000 and also claim the full interest deduction of Rs3,00,000, thus showing a deficit of Rs1,95,000 (Rs1,50,000-Rs45,000-Rs3,00,000). For the first house he can show the annual value as ‘Nil’ and claim the deficit of Rs2,00,000 as interest paid.
Thus he can effectively claim set off for Rs3,95,000 (Rs1,95,000+Rs2,00,000) against his other taxable income, apart from the benefit of deduction of up to Rs1,50,000 under Section 80C in respect of repayment of principal.
Patel is an international tax attorney.