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T. Banusekar

I HAD taken a loan from a financial institution for purchase of a property at an interest rate of 17 per cent an annum.

The institution agreed to reduce this rate of interest to 11.5 per cent per annum on my paying a one time rewriting charge of Rs 3,200. Can this charge be claimed as a deduction in computing income from house property?

D. C. N. Srinivasa Rao

Reply

No deduction can be claimed in respect of such rewriting charge in computing income from house property.

The only deductions that are permissible in computing income from house property are by way of taxes levied by a local authority and 30 per cent of the annual value if the property is let and by way of interest on borrowed capital where the capital is borrowed for purchase, construction, repairs, renewals or reconstruction of property whether or not the property is let. It may be noted that if the property is self occupied the deduction in respect of interest on borrowed capital will be restricted to the limits prescribed by Section 24.

It may also be noted that in certain cases, unrealized or irrecoverable rent may be claimed as a deduction in computing income from house property.

Query

I have taken a loan for purchase of land from a housing finance company.

I have not yet begun constructing a house but propose to do so next year. I would like to know whether the interest and principal that I pay to the housing finance company would be eligible for rebate?

Aruna Vinodh

Reply

Interest on loan taken for the purchase of a plot on which, a house is to be constructed should also qualify for the deduction under Section 24 and further that the principal repayment of such loan should also qualify for the rebate under Section 88.

This view has been expressed for the reason that it would only be fair that this view be taken given that the objective of purchase of the plot is to be build a house and further that a house cannot normally be purchased or bought or constructed without purchase of a plot of land.

In this context reference had also been made to Circular No.667 dated October 18 1993 of the Board rendered in the context of Sections 54 and 54F, which are exemptions available in computing capital gains.

Given this in the background it may be clarified that no deduction or rebate can be claimed until such time as the construction of the house is complete.

The interest up to the previous year immediately preceding the previous year in which the construction is completed will however qualify as pre construction period interest which can be claimed as a deduction in five equal annual instalments commencing from the year in which the construction of the house is completed but within the overall ceiling limits.

Query

I have taken a loan for construction of a land. I propose to take one more loan for construction of a property on the said land. Both these loans will be with the same bank. If two separate accounts are maintained by the bank in respect of the two loans, will it be possible for me to claim interest on both the loans?

Sudev

Reply

It has already been clarified that interest on loan taken for purchasing a land on which building is to be constructed will also qualify for deduction in computing income from house property.

The fact that the bank maintains separate accounts in respect of the two loans will not make any difference on the allowability of interest.

Query

I own a house, which consisted only of a ground floor. I have borrowed money and constructed a first floor to this house.

My employer, a nationalised bank has issued a circular to the branches that in such a case, it is only a reconstruction of the house and that therefore the interest on borrowed capital can be allowed as a deduction if the property is self occupied only to the extent of Rs 30,000. Is this view of my employer a correct one?

George Augustin

Reply

Interest on capital borrowed for purchase, construction, repairs, renewals or reconstruction is allowed as a deduction in computing income under the head "Income from House Property". The deduction is available in respect of self-occupied property to the following extent:

Rs 30,000.

Rs 1,50,000 if the capital is borrowed on or after April 1, 1999 and the construction or acquisition is completed within three years from the end of financial year in which the capital is borrowed.

It is clear that the enhanced deduction of Rs 1,50,000 would be available only for purchase or construction and not where the borrowal is for repairs, renewals and reconstruction.

In the reader's case the construction of the first floor, it appears should not be taken as reconstruction thereby restricting the interest that can be claimed to only Rs 30,000.

The enhanced deduction of Rs 1,50,000 should be available in respect of interest on the said loan.

If the employer treats this as reconstruction and restricts the quantum of deduction to a maximum of Rs 30,000 for computing the tax to be deducted at source, the only recourse to the reader will be by way of furnishing a return with a claim for refund.

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