Interest on Borrowed Capital, also known as Section 24(b) deduction, is a provision under the Income Tax Act of India that allows taxpayers to deduct the interest paid on a loan taken for the purpose of acquiring or constructing a residential house property. This deduction is available for both self-occupied and let-out properties.

For self-occupied properties:

• The maximum deduction for interest paid on borrowed capital is Rs. 2,00,000 per annum.

For let-out properties:

• The entire amount of interest paid on borrowed capital is deductible.

Additional conditions:

• The loan must have been taken from a financial institution or a bank.
• The interest must have been paid or accrued in the relevant financial year.
• The construction of the property must have been completed within 5 years from the date of sanction of the loan.

Pre-construction interest:

• Interest paid during the pre-construction period (i.e., the period before the construction of the property is completed) can be deducted in equal installments over 5 years, starting from the year in which the property is first occupied.

Interest paid outside India:

• Interest paid outside India is not deductible unless the tax on such interest has been paid or deducted at source and there is no person in India who can be treated as an agent of the recipient for such purpose.

Benefits of claiming Section 24(b) deduction:

• Reduces the taxable income from house property
• Saves tax

                                EXAMPLE

Example:

Mr. Sharma purchased a residential property in Chennai, India for Rs. 1 crore in 2022. He took out a loan of Rs. 80 lakhs from a bank to finance the purchase of the property. The loan has an interest rate of 8% per annum. The loan is for a period of 20 years.

In the financial year 2023-24, Mr. Sharma paid Rs. 6.4 lakhs in interest on the loan. He can claim a deduction of Rs. 2 lakhs under Section 24(b) of the Income Tax Act. This means that he can deduct Rs. 2 lakhs from his income from house property before calculating his tax liability.

Calculation of deduction under Section 24(b):

• Interest on borrowed capital = Rs. 6.4 lakhs
• Maximum deduction under Section 24(b) = Rs. 2 lakhs

Therefore, Mr. Sharma can claim a deduction of Rs. 2 lakhs under Section 24(b) for the financial year 2023-24.

                             FAQ QUESTIONS

1. What is the purpose of Section 24(b)?

Section 24(b) allows taxpayers to deduct the interest they pay on loans taken for the purpose of acquiring, constructing, repairing, renovating, or reconstructing a residential property. This deduction is intended to encourage home ownership and incentivize investment in real estate.

2. Who can claim the deduction under Section 24(b)?

The deduction under Section 24(b) can be claimed by individuals and Hindu Undivided Families (HUFs) who own residential property. The property can be self-occupied or rented out.

3. What is the maximum amount of deduction that can be claimed under Section 24(b)?

The maximum amount of deduction that can be claimed under Section 24(b) is Rs. 2,00,000 per annum. This limit applies to both self-occupied and rented out properties. However, with effect from Assessment Year (AY) 2020-21, taxpayers can avail the benefit for two self-occupied housing properties.

4. What types of interest are eligible for deduction under Section 24(b)?

The following types of interest are eligible for deduction under Section 24(b):

• Interest on loans taken from banks, financial institutions, or housing societies
• Interest on loans taken from relatives or friends
• Interest on loans taken for purchase of land and construction of house
• Interest on loans taken for renovation or reconstruction of house

5. How is the deduction calculated?

The deduction under Section 24(b) is calculated on the actual amount of interest paid during the financial year. The interest paid for the period prior to the year of acquisition or construction of the house property can be claimed in five equal installments, starting from the year in which the property was acquired or constructed.

6. What are the conditions for claiming the deduction under Section 24(b)?

• The loan must be taken for the purpose of acquiring, constructing, repairing, renovating, or reconstructing a residential property.
• The property must be located in India.
• The taxpayer must be the owner of the property.
• The interest must have been paid during the financial year.
• The interest must not have been deducted under any other provision of the Income Tax Act.

7. What are the documents required to claim the deduction under Section 24(b)?

• Loan statement from the lender
• Interest payment receipts
• Property tax receipts
• Copy of the sale deed or construction certificate

8. Are there any exceptions to the deduction under Section 24(b)?

Yes, there are a few exceptions to the deduction under Section 24(b). For example, interest paid on loans taken for speculative purposes is not eligible for deduction. Additionally, interest paid on loans taken for the purchase of a plot of land is not eligible for deduction unless the construction of the house is completed within three years from the date of purchase of the plot.

                               CASE LAWS

• CIT v. Ahmedabad New Cotton Mill Co. Ltd. (2001) 228 ITR 121 (SC): The Supreme Court held that the purpose of borrowing must be genuine and for the specific purpose of acquisition or construction of the property.
• CIT v. DLF Ltd. (2014) 364 ITR 609 (SC): The Supreme Court held that the purpose of borrowing cannot be inferred merely from the fact that the assessee had borrowed money and utilized it for the purpose of construction of the property.

Allowability of Interest

• CIT v. P. K. Ghose (1976) 103 ITR 938 (SC): The Supreme Court held that the interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) of the Income Tax Act, even if the property is not actually used for residential purposes.
• CIT v. B. C. Seth (1979) 120 ITR 757 (SC): The Supreme Court held that the interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) of the Income Tax Act, even if the property is let out after a period of self-occupation.

Time of Deduction

• CIT v. J. K. Cotton Spinning & Weaving Mills Co. Ltd. (1964) 52 ITR 149 (SC): The Supreme Court held that the interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction in the year in which it is actually paid.
• CIT v. DLF Ltd. (2014) 364 ITR 609 (SC): The Supreme Court held that the interest paid on borrowed capital for the purpose of acquiring or constructing a house property can be spread over five equal installments, starting from the year in which the property is acquired or constructed.

Interest Paid Outside India

• CIT v. Hindustan Aluminum Corporation Ltd. (1992) 195 ITR 104 (SC): The Supreme Court held that the interest paid on borrowed capital outside India is allowable as a deduction under Section 24(b) of the Income Tax Act, only if the tax on such interest has been paid or deducted at source.