One of the biggest tax bonanzas for individual taxpayers is in the form of deduction towards interest on housing loan available u/s 24(b) of the Income Tax Act, 1961. Deduction is restricted to Rs. 2 lakhs for self-occupied house property. Let us have a look at some of the interesting issues while claiming deduction towards interest of housing loan.

1. Deduction on due basis & not on actual payment basis

Deduction towards housing loan Interest is available on accrual basis i.e., even if the interest is not paid during the year, still the deduction would be admissible. While computing the amount of deduction, one needs to be careful & should claim the deduction on accrual basis.

2. Interest on unpaid interest

Interest on housing loan is charged on monthly basis by the bank and if the amount is not paid then interest is again charged on interest debited of earlier month debited to loan a/c. Deduction u/s 24(b) is available only on borrowed capital. Interest paid on such unpaid interest is not deductible as it is not “Interest on borrowed capital”.

3. Commission/ processing fees

Any amount of brokerage & commission paid for arranging the loan or processing fees/ stamp duty charges paid for mortgage is not eligible for deduction.

4. Takeover of loan

Very often, taxpayers shift housing loan from one bank to another bank to enjoy the benefit of lower interest rate.

1. If the housing loan account is shifted from one bank to another bank then also the benefit of deduction can be claimed by taxpayers on new loan. CBDT vide circular no. 28 dated 20.08.1969 has clarified that interest on fresh loan taken to repay the original loan is allowable as deduction.

2. Prepayment penalty paid at the time of takeover (or prepayment penalty paid for closing the loan at any time) is not admissible as deduction.

3. If the loan amount is shifted from one bank to another for availing some additional top-up loan for business/ personal purposes, then deduction will be restricted to the extent of amount of original loan only.

5. Interest paid on unpaid purchase price

There are situations where the purchaser doesn’t pay full amount of purchase to the seller but converts it in to loan. In some cases, purchaser purchases the property in installment. In such cases, unpaid price can be treated as borrowed capital. Interest paid on unpaid purchase consideration is also eligible for deduction u/s 24(b).

6. Interest on mortgage loan

Deduction u/s 24(b) is available only if the loan is utilized for purchase, construction, repairs etc. of the house property. If the purpose of the loan is one which specified u/s 24(b), then deduction will be available even if the loan is titled as ‘mortgage loan’. Similarly, if the purpose of loan is not one specified in section 24(b) then no deduction would be available even if the loan is titled as ‘housing loan’.

7. Interest paid outside India

Interest payable outside India will also be eligible for deduction u/s 24(b) provided that interest is paid after deduction of tax at source (TDS) or is paid some person who can be treated as an agent in India of the recipient of interest.