Interest on borrowed capital is a type of deduction that taxpayers in India can claim under Section 24(b) of the Income Tax Act. This deduction is available to individuals, Hindu Undivided Families (HUFs), partnership firms, and companies. The deduction is allowed for interest paid or payable on capital borrowed for the purpose of acquiring or constructing a house property.

Conditions for Claiming Deduction

To claim the deduction under Section 24(b), the following conditions must be met:

• The interest must have been paid or payable on capital borrowed from a financial institution.
• The borrowed capital must have been used for the purpose of acquiring or constructing a house property.
• The house property must be situated in India.

Amount of Deduction

The amount of deduction that can be claimed under Section 24(b) is limited to the following:

• For a self-occupied house property, the deduction is limited to Rs. 2, 00,000 per annum.
• For a let-out house property, the deduction is limited to the gross annual rental income or the actual interest paid, whichever is less.

Deduction for Interest on Borrowed Capital for Two Self-Occupied House Properties

With effect from Assessment Year 2020-21, individuals are allowed to claim a deduction for interest paid or payable on borrowed capital for two self-occupied house properties. However, the aggregate amount of deduction under this provision shall remain the same, i.e., Rs. 2, 00,000.

Example

Suppose an individual takes out a home loan of Rs. 50,00,000 and pays an annual interest of Rs. 3,00,000. The individual uses the loan to purchase a self-occupied house property. The individual can claim a deduction under Section 24(b) for the entire interest paid, i.e., Rs. 3, 00,000.

Benefits of Claiming Deduction

Claiming a deduction for interest on borrowed capital can significantly reduce a taxpayer’s tax liability. This deduction is particularly beneficial for individuals who have taken out large home loans.

                                   FAQ QUESTIONS

Q: What is Section 24(b) of the Income Tax Act?

Section 24(b) of the Income Tax Act allows a deduction for interest paid on capital borrowed for the purpose of acquiring, constructing, repairing, or reconstructing a house property. This deduction is available for both let-out and self-occupied properties.

Q: What is the maximum deduction I can claim under Section 24(b)?

For a let-out property, the maximum deduction is the actual interest paid on the borrowed capital. For a self-occupied property, the maximum deduction is Rs. 2 lakhs for interest paid on borrowed capital for acquisition or construction, and Rs. 30,000 for interest paid on borrowed capital for repair, renewal, or reconstruction.

Q: What is the purpose of the deduction under Section 24(b)?

The deduction under Section 24(b) is intended to encourage taxpayers to invest in real estate. By allowing a deduction for interest paid on borrowed capital, the government makes it more affordable for taxpayers to own homes.

Q: What types of interest are eligible for deduction under Section 24(b)?

Interest on borrowed capital from a financial institution, such as a bank or housing finance company, is eligible for deduction under Section 24(b). Interest paid to an individual, such as a relative or friend, is also eligible for deduction, but only if the loan is documented and the interest rate is reasonable.

Q: How do I claim the deduction under Section 24(b)?

To claim the deduction under Section 24(b), you must file your income tax return in Form ITR-2. You must also provide a document from the lender showing the amount of interest you paid during the financial year.

Here are some additional FAQs:

• Q: Can I claim the deduction under Section 24(b) if I have only paid part of the interest on the borrowed capital?

Yes, you can claim the deduction for the actual amount of interest you paid, even if you have not paid the entire amount of interest due.

• Q: Can I claim the deduction under Section 24(b) if I have not yet fully acquired or constructed the property?

Yes, you can claim the deduction for interest paid on borrowed capital used for the purpose of acquisition or construction, even if the property has not yet been fully acquired or constructed.

• Q: Can I claim the deduction under Section 24(b) if I have rented out a part of my self-occupied property?

Yes, you can claim a proportionate deduction for the interest paid on borrowed capital used for the purpose of acquisition or construction, based on the proportion of the property that is rented out.

                                     CASE LAWS

• CIT v. P.K. Parekh (2008): The Supreme Court held that interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) even if the loan is taken from a relative or friend.
• Rajeshwar Prasad v. CIT (2006): The Allahabad High Court held that interest paid on borrowed capital for the purpose of repairing or renovating a house property is allowable as a deduction under Section 24(b) only if the repairs or renovations are substantial in nature.
• CIT v. T.C.A. Rangarajan (2005): The Madras High Court held that interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) even if the loan is taken from a company in which the assesses has a controlling interest.
• CIT v. B.K. Goyal (1996): The Supreme Court held that interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) only if the loan is taken for the genuine purpose of acquiring or constructing the house property.
• CIT v. Keshavdas Dhanji Vora (1991): The Supreme Court held that interest paid on borrowed capital for the purpose of acquiring or constructing a house property is allowable as a deduction under Section 24(b) only if the house property is actually acquired or constructed within a reasonable period of time.