Housing loans and their tax benefits

T. Banusekar

QUITE often, inadequate information about the formalities associated with housing loans can be frustrating for those using them. This week, `Tax Talk' answers some queries about the tax benefits, deductions and interest rates with regard to housing loans. The column also clarifies a query about capital gains.

Query

I was getting tax benefits for a loan taken from LIC HFC for a flat purchased in 1994. This benefit has stopped since I paid off the loan from my provident fund account directly. Can I get a fresh loan from LIC or HDFC for renovation or repairs of my flat and get tax benefits for the new loan? If yes, will the tax benefit be for the principal and interest? What is the limit?

K. Parthasarathy

Reply

The interest paid on the amount borrowed for renovation or repair of a house/property would also be allowed as a deduction under Section 24(1)(vi). The deduction would be restricted to Rs 30,000 if the property is self-occupied and can be availed in full without any limit if the property is let out. However, no rebate under Section 88 would be allowed on the principal repaid, for such rebate will be available only if the payment is of money borrowed for purchase or construction of a residential house.

Query

I took a housing loan in 1985 from my bank and have been claiming benefits under Section 88 and under Section 24. I am now constructing a second unit (flat) with financial assistance from Canfin Homes, Tiruchi and the possession of the second unit would be taken in April 2001. The repayment for the second loan would start from April 2001. Till the construction is over, I am required by the housing finance company to pay pre-EMI interest. Kindly clarify the following:

A Can I claim income-tax benefits under Sections 88 and 24 for both units? The first unit is now self-occupied. After taking possession of the new house, the first property would be let out and the second would be self-occupied.

A Is the pre-EMI I would be paying until the completion of construction eligible for deduction under Section 24 for the assessment year 2001-02.

T. Chellappa

Reply

The benefit of deduction in respect of interest on housing loan under Section 24 and rebate under Section 88 on the repayment of housing loan would be available in respect of both property. Since the second unit would be self-occupied, a deduction can be claimed in respect of the interest on the loan taken for constructing this property up to a maximum of Rs 1 lakh, provided the loan has been taken after March 31, 1999. For the first unit, deduction can be claimed in full without any ceiling, since it would be let out.

The amount paid as pre-EMI interest would qualify for deduction under Section 24(1)(vi) in equal instalments over five years, commencing from the year in which the construction was completed. This would, however, be subject to the overall ceiling of Rs 1 lakh stated above.

Query

I refer to Tax Talk (`All about capital gains', October 1). I seek certain further clarifications.

The article does not cover the question as to the date on which capital gains will arise to the developer.

The column had stated that capital gains will arise to a land owner on the date the developers are likely to hand over the built up area to the landowners. In this connection reference may be made to Section 2(47)(v) and Section 53A of the Transfer of Property Act (TPA).

In such a case, the capital gains cannot arise on the handing over of such built up area to the landowners. This is so because there is no transfer of any capital asset on that day. It would further be so because Section 53A of the TPA has been referred to in Section 2(47)(v) only for the purpose of ensuring that the parties to the agreement will be entitled to a specific performance of the terms and conditions of the agreement.

This cannot be construed as `giving possession' within the meaning of Section 53A of the TPA. Further, it may be noted that section 53A of TPA only imposes a statutory bar on the transferor and conveys no title to the transferee. Reference may be made to the Supreme Court's decision in the Delhi Motor Company versus Basuarkar 2 SCR 720 case. Therefore, capital gains can arise only when the relevant sale deeds are registered by the landowners in favour of the developers or their nominees.

R. Balasubramanian

Chennai

Reply

The developer is normally a flat promoter and the question of capital gains is unlikely to arise in such cases. The income arising to the flat promoter (developer) should be taxable under the head profits and gains of business or profession. It may be noted that the querist to whom the answer was given through this column, had specifically wanted an answer from the point of view of the landowner and not the developer.

At the outset, it is clarified that this column had only stated capital gains will arise when the possession of constructed area is given to the land owners or when the conveyance is registered, whichever is earlier. This view, it was stated, would hold good only where the developer is given only a right to enter the premises for the purpose of construction, the ownership continuing to remain with the landowners.

The reader has pointed out that Section 53A of the TPA has been referred to in Section 2(47)(v) only for the purpose of safeguarding that the parties to the agreement will be entitled to a specific performance of the terms and conditions of the agreement. The columnist begs to submit that it could never be the intention of the Income-Tax Act to safeguard the parties to an agreement. Such an intention could well be there in the TPA. The object of the Income Tax Act is to tax income. It is further submitted that the intention of a reference to the Section 53A of the TPA in Section 2(47)(v) is to safeguard the interests of revenue so that transfers are taxed even when possession is given in part performance of a contract.

In the answer given in the article, the view earlier stated was taken not because of Section 53A of the TPA coming into play. It was because the consideration for the transfer of part of the land has already been received by the landowner by way of constructed area in case where the possession is given by the developer. It cannot be said that after the entire consideration is paid, the landowner has any right over the share of land, which is to be given to the developer or his nominees.

Under these circumstances, it is felt that reference to the Supreme Court's decision rendered in the context of Section 53A of the TPA need not be further gone into. In any case, to say that capital gains will arise only when the sale deed is registered, does not sound reasonable. Merely because the developer is unable to find a willing buyer, it cannot be that the liability to capital gains tax will be postponed indefinitely in the hands of the landowner; more so when he has already taken possession of the constructed area, which is the consideration for the transfer.

The reader has also suggested that the opinion is furnished without any basis and should be given only with reference to decided case laws or the provisions of various enactments. In this connection, it is submitted that there are no reported case laws in this subject to the knowledge of the columnist and also that the opinion was given based on the provisions of Section 2(47) read with Section 45 of the Income-Tax Act, 1961. The opinion is not based on any assumption or presumption, as stated by the reader.

Section 2(47) refers to a transaction involving the allowing of possession of immovable property in part performance of a contract of the nature referred to in Section 53A of the TPA. It may be observed that the Section refers only to contracts of the nature referred to in Section 53A of the TPA and does not take in the full import of Section 53A of the TPA into the definition of the term transfer.(The author is a Chennai-based practising chartered accountant. This column appears on the first and third Sundays of every month.)

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600 002, or by e-mail to vaidy@thehindu.co.in