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Does your home, saveour income tax? Buying a house for self-occupation can be biggest tax saving instrument. It saves your income tax in two ways. You can save maximum Rs 75750 per year on your home.
Introduction:
There are two main benefits which are available under Income Tax Act, 1961 in relation to Purchase or Construction of House Property which are described as under:
The house property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount payable towards interest on borrowed capital is allowed as deduction under u/s 24(b) of the Income-tax act.
(a) In case property is acquired or constructed with capital borrowed on or after 01-04-1999 and such acquisition or construction is completed within 3 years of the end of the financial year in which the capital was borrowed:
Minimum of Actual Interest payable or Rs 1, 50,000/- .
(b) In case property is acquired or constructed with capital borrowed
Minimum of Actual Interest payable or Rs 30,000/- .
Interest payable on barrowed capital for the previous year is allowed as deduction under U/s 24(b).
Any payment made for purchase or construction of a residential house property which is chargeable to tax under the head “Income from House Property” towards any installment or part payment due to any Bank, Financial Institution, Company or Co-Operative Society towards the cost of the house property allotted to him is allowed as deduction U/s 80 C of the Income Tax Act, 1961 to the extent of Rs. 1,00,000 along with other Specified Investments mentioned under Section 80 C of the Income Tax Act, 1961.
The amount you pay as stamp duty or registration fee when you buy a house can be claimed as deduction under section 80C in the year of purchase of the house.
Many homeowners expand their existing homes as family needs grow. A common question that arises is whether a taxpayer can claim an additional deduction u/s 24(b) of the Income-tax Act when a fresh loan is taken for constructing an extra floor on a self-occupied house. Let us understand the tax implications in detail. The Practical Scenario Consider the following situation:
Question: Can the taxpayer claim a deduction for interest on the fresh loan u/s 24(b)?
Answer: Yes. The taxpayer can claim a deduction for interest on the fresh loan taken for the construction of an additional floor, subject to fulfillment of prescribed conditions and the overall limits under Section 24(b).
Section 24(b) of the Income Tax Act allows deductions for interest payable on borrowed capital utilized for the purchase of a house property, construction of a house property, reconstruction of a house property, and repair, renewal, or improvement of a house property. Since construction of an additional floor amounts to further construction, reconstruction, or improvement of the existing residential property, the interest on a loan taken specifically for such construction qualifies for deduction u/s 24(b).
The law does not restrict the deduction only to the original construction of a house. Where a taxpayer borrows funds for the extension of an existing house, the addition of new residential space, and the construction of another floor, the borrowing continues to be linked with the house property and therefore falls within the scope of Section 24(b). Accordingly, a fresh loan taken for constructing an additional floor is eligible for interest deduction.
The taxpayer should be able to demonstrate that the borrowed funds were actually utilized for construction of the new floor. The following documents should be preserved: Loan sanction letter, loan account statements, Construction agreements, contractor bills, material purchase invoices and Bank statements evidencing utilization of funds. Proper documentation becomes crucial in case of scrutiny by the Income Tax Department.
Interest relating to the construction period is treated as pre-construction interest. The deduction generally becomes available after completion of the construction of the new floor and subject to the provisions governing pre-construction interest.
The most important aspect to understand is that the law provides a limit for self-occupied property.
| Particulars | Amount |
|---|---|
| Maximum deduction under Section 24(b) for self-occupied property | INR 2,00,000 per year |
This limit applies to the total interest payable on all eligible housing loans relating to the same self-occupied property. Therefore, interest on the original housing loan and the new loan for additional floor construction must be aggregated while computing the deduction.
Many taxpayers assume that since a fresh housing loan has been taken, another deduction of INR 200,000 becomes available. This understanding is incorrect. The law does not grant a separate ceiling for every housing loan. Instead, the aggregate interest deduction for a self-occupied house remains restricted to INR 200,000 annually.
Suppose the following interest is payable during a financial year:
| Particulars | Amount |
|---|---|
| Interest on original housing loan | INR 1,20,000 |
| Interest on additional floor loan | INR 1,50,000 |
| Total interest | INR 2,70,000 |
Although actual interest paid is INR 270,000, the deduction u/s 24(b) will be restricted to INR 200,000 only. Balance interest cannot be claimed due to the statutory cap applicable to self-occupied property.
If interest is paid on the fresh loan during the construction phase of the additional floor:
However, these installments are also subject to the overall deduction limit applicable to self-occupied property.
Old Tax Regime
| Particulars | Position |
|---|---|
| Deduction under Section 24(b) for self-occupied property | Available up to INR 2,00,000 |
New Tax Regime
| Particulars | Position |
|---|---|
| Deduction under Section 24(b) for self-occupied property | Generally not available |
Therefore, the benefit of interest deduction on the fresh loan is primarily relevant to taxpayers opting for the old tax regime. following are key takeaways:
Conclusion
A taxpayer who constructs an additional floor on an existing self-occupied house and finances the construction through a fresh housing loan can claim a deduction of the interest paid on such a loan u/s 24(b) of the Income Tax Act. However, the benefit is not unlimited. For a self-occupied property, the interest on both the original loan and the fresh construction loan is combined, and the deduction remains subject to the overall ceiling of INR 2,00,000 per annum under the old tax regime. Therefore, while a fresh deduction is permissible, it operates within the existing statutory framework and does not create a separate deduction limit for the new loan.
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