Interest on Pre Construction

8/11/2019 Interest on Pre Construction

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INTEREST ON PRE CONSTRUCTION -HOUSE LOAN-INCOME TAX

Money may be borrowed prior to the acquisition or construction of the property. In such a case,

interest paid/payable before the final completion of construction or acquisition of the property will be

aggregated and allowed for five successive financial years starting with the year in which the

acquisition or construction is completed. This deduction is not allowed if the loan is utilized forrepairs, renewal or reconstruction.

Example:- The assessee took a loan of Rs. 3,00,000/- in April, 1999 from a Bank for construction of

a house on a piece of land which he owns at Meerut. The loan carried interest @ 15% p.a. The

construction is completed in April 2001 and the house is given on rent from May 2001. Meanwhile he

has already incurred liability of interest of Rs. 90,000/- for F.Y. 1999-2000 and 2000-01. Because of

the above provision, the assessee can claim a deduction in respect of this interest of Rs. 90,000/-

(Over and above the yearly interest) in five equal instalments of Rs. 18,000/- each starting from the

assessment year 2002-03.

Pre EMI-Interest And Pre-Construction Period interest

Normally we read a term in our Bank loan statement " pre EMI interest" but remember the pre EMI

interest term given in Loan Statement is not necessarily same meaning as pre construction period as

per income tax act.

As per Income tax pre construction period means

Interest up to the end of Financial year ,immediate proceeding to the year in which house

is completed.

suppose loan is taken on Jan ,2008 and House is completed on 31.01.2010, in that case pre -

construction Interest is taken from Jan 2008 to March 2009.

In above example ,even if House is completed on 31.03.2010 then also the pre construction Interest

is considered From Jan 2008 to march 2009.

As per Bank Pre -EMI interest means ,Interest Due up to the start of payment of

First Instalment..So term used in Bank statement or loan certificate is not similar as defined in

Income Tax Act.

In above example suppose bank has granted and disbursed the Loan in Jan 2008 but EMI started

from Jan 2009.Then Interest from JAN,2008 to Jan 2009 is treated as PRE-EMI interest By the

bank.

Instalments Of pre-Construction Interest as per Income Tax Act.

Suppose : Person has taken a Loan of 10,00,000 in July 2007 @ 10% and house is completed in

Jan ,2010.

Year wise Interest is

FY 2007-08=60000(July to March)
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FY 2008-09=80000

FY 2009-10 =70000

then define Pre construction period and how much amount will be allowed u/s 24(b) year wise

In above example ,pre construction period is July 2007 to March 2009 and pre construction period

Interest is 140000(60000+80000) ,and deduction of the pre construction period is divided in 5

instalments of 28000 (140000/5).and deduction will be allowed from FY 2009-10.

so in FY 2009-10 interest allowed will be 70000+28000(ist instalment of pre construction

period)=98000

and 28000 will also be allowed in 2010-11,2011-12,2012-13 and 2013-14 as pre construction

period interest in addition to normal interest due in given years.

INTEREST ON HOUSE LOAN- INCOME TAX ACT

Interest on borrowed capitalis allowable as deduction on accrual basis (even if account books are

kept on cash basis) if capital is borrowed for the purpose of purchase, construction, repair, renewal

or reconstruction of the house property.

The following aspects concerning claim for deduction of interest are to be kept in view:

1. The interest is deductible on payable basis i.e. onaccrual basis. Hence it should be claimed on

yearly basis even if no payment has been made during the year.

2. For claiming interest, it is not necessarythat the lender should have a charge on the property

for the principal amount or the interest amount. Means mortgage of House is not necessary.

3. In Shew Kissan Bhatter v. CIT (1973) 89 ITR 61 (SC) the Supreme Court has decided that

interest payable for outstanding interest is not deductible.Interest on late deposit (interest on

interest )not allowed.

4. Taxpayer cannot claim deduction for any brokerage or commission paid for arranging loan either

as a one time arrangement or on periodical basis till the loan continues.

5. In terms of circular No. 28 dated 20th August 1969, if an assessee takes a fresh loan to pay back

the earlier loan, the interest on the fresh loan would be deductible.

6. Interest on borrowing can be claimed as deduction only by the person who has acquired or

constructed the property with borrowed fund. It is not available to the successor to the property (if

the successor has not utilized borrowed funds for acquisition, etc). In other words, the

relationship of borrower and lender must come into existence before it can be said thatany amount or any other money is borrowed for the purpose of construction, acquisition, etc., of

house property by one person from another and there must be real transaction of borrowing and

lending in order to amount to any borrowing.

7. In case of Central Government employees, interest on house building advance taken under the

House Building Advance Rules (Ministry of Works and Housing) would be deductible on the basis

of accrual of interest which would start running from the date of drawal of advance. The interest
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that accrues in terms of rule 6 of the House Building Advance Rules is on the balances

outstanding on the last day of each month - Circular No. 363, dated June 24, 1983.

8. Any interest chargeable under the Act, payable out of India on which tax has not been paid or

deducted at source, and in respect of which there is no person in India who may be treated as an

agent, is not deductible, by virtue of Section 25, in computing income chargeable under the head

Income from house property.

9. Loan can be taken from any body,unlike section 80C where the specified institutions has been

given .In section 24(b) no institution has been defined ,means interest payable even to friend

/relative etc for House is also deductible under section 24(b)

INTEREST ON HOUSE LOAN SELF OCCUPIED HOUSE 150000 or 30000?

As you may know where a person has occupied more than one house for residential purposes, only

one house, as chosen by him will be treated as self occupied and all other houses will be deemed

to be let out and the income from such houses would be computed as indicated earlier. In regard to

one house treated as used for own residential purposes throughout the year, Section 23 (2) (a)

prescribes that annual value of such house shall be taken to be nil, if the conditions mentionedbelow are satisfied:

the property (or part thereof) is not actually let during whole (or any part) of the previous year; and

no other benefit is derived therefrom

Interest on borrowed capital for self occupied property

The maximum amount of interest permissible in cases of self-occupied property is Rs.1,50,000 (in

respect of funds borrowed on or after 01.04.1999). Interest upto Rs.1,50,000 is deductible if the

following conditions are satisfied:

Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property;

the acquisition/construction should be completed within 3 years from the end of the financial year in

which capital was borrowed; and the person extending the loan certifies that such interest is payable

in respect of the amount advanced for acquisition or construction of the house or as refinance of the

principal amount outstanding under an earlier loan taken for such acquisition or construction.

In the above context the following further aspects have to be kept in view:

1. If capital is borrowed for any other purpose (e.g. if capital is borrowed for reconstruction, repairs

or renewals of a house property), then the maximum deduction on account of interest is

Rs.30,000 (and not Rs.1,50,000).

2. There is no stipulation regarding the date of commencement of construction. Consequently,

the construction of the residential unit could have commenced before April 1,1999 but, as long as

its construction/ acquisition is completed within 3 years, the higher deduction of Rs.1,50,000
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would be available. Also, there is no stipulation regarding the construction/acquisition of the

residential unit being entirely financed by the loan taken on or after April 1, 1999. It may be so in

part.However, the higher deduction upto Rs.1,50,000 can be taken for the loan which has been

taken and utilized for construction/acquisition after April 1, 1999. The loan taken prior to April 1,

1999 will carry deduction of interest upto Rs. 30,000 only (CBDTs circular No. 779,dated

September 14, 1999).

Rs. 1,50,000 maximum deduction will not be available in the following situations:

1. if capital is borrowed before April 1, 1999 for purchase,construction, reconstruction, repairs or

renewals of a house property;

2. if capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house

property; and

3. if capital is borrowed on or after April 1, 1999 but construction is not completed within 3 yearsfrom the end of the year in which capital was borrowed. In the above situations only deduction

upto Rs. 30,000 can be claimed

HOUSE LOAN BENEFIT AND SECTION 80C

All most 25 % queries online are regarding housing loan benefits under income tax act and second

after Queries Relating to Pan Allotment. In this post we will discuss only points relating to benefit of

house loan under section 80C.we have tried to cover all the important issues but if any left or you

have different thoughts than ours please record in comments section.

1. Deduction for house loan /installment available up to Rs.100000 /-

2. The limit of one lac as above is total limit u/s 80C for all type of savings ,plus section

80CCC(pension policy) plus u/s 80CCD(Contributory Pension Plan).Means the aggregate

amount of deduction under above referred sections can not exceed Rs. 1,00,000.

3. The payment of loan should be made towards cost of purchase/construction of

new residentialhouse property.

4. The house property income should be assessable in the hand of asseessee in simple term

assessee should be the ownerof the house property.

5. The payment should not be for addition or alteration to,or renovation or repair of house property

6. House construction must be completed before the end of the previous year (read detailshere)Completion of house means

1. completion certificate in respect of the house property by the authority competent to issue

such certificate or

2. house property or part has been occupied by the assessee or any other person on behalf of

assessee or

3. has been let out;
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7. Housing loan for more than one house can also be claimed.

8. All the benefit of tax u/s 80 c will reversed if house property is sold with 5 year from purchase of

house property

9. The tax benefit under section 80C is available on residential house property only and not

available on commercial house property.

10. Loan should be taken from Specified institutions/deptt only given below

1. Central or State Government

2. any Bank including co-operative bank

3. LIC or National Housing Bank

4. public company formed and registered in India or co-operative society with main object to

provide long term finance for construction purchase of houses in India.

5. Assessee Employer if public company or public sector company or university established by

law or a college affiliated to such university or local authority or co-operative society.

11. The benefit is available only to Individual assessee and to HUF assessee.

12. The above benefit is available even assessee already has another house property.

13. The benefit is available on payment basis ,no matter to which year payment is relates to orpayment overdue or not.

14. From total amount of installment paid of house loan reduce amount availed under deduction

section 24.(INTEREST)

15. The Benefit under this section is available whether residential house property is rented or self

occupied,butHouse must be completed by the end of the previous yearin which deduction is to

be claimed .

16.Pre EMI paid in a financial year are also eligible for deduction if house property is completed by

the end of financial year.

17. Stamp duty, registration fee and other expenses for the purpose of transfer of such house

property to the assessee is also eligible for deduction under this section even assesseehas not taken any loan .

18. There is no requirement that for loan ,house property should be mortgaged to the institution from

which the loan has been taken ,but it should be used for the purpose of purchase /construction of

house property.

Deduction from income from house property for interest on housing loan

The existing provisions contained in section 24 of the Act provide that income chargeable under the

head Income from house property shall be computed after making certaindeductions. Clause (b) of

the said section provides that where the property is acquired with borrowed capital, the amount

of any interest payable on such capital shall be allowed as deduction in computing the income from

house property. The second proviso to clause (b) of the said section, inter-alia, provides that in case

of self occupied property where the acquisition or construction of the property is completed within

three years from the end of the financial year in which the capital is borrowed, the amount of

deduction under that clause shall not exceed one lakh fifty thousand rupees.
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There has been appreciation in the value of house property and accordingly cost of finance has also

gone up.

Therefore, it is proposed to amend the second proviso to clause (b) of said section 24, so as to

increase the limit of deduction on account of interest in respect of property referred to in sub-section

(2) of section 23 to two lakh rupees.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the

assessment year 2015-16 and subsequent assessment years

HOUSE PROPERTY INCOME TAX RETURN FILING 10 POINT

on Sunday, July 15, 2012

Last week, Mr Nilesh Jivani has asked very interesting 10 queries about how to treat House property

Income in Income Tax return ,we have tried to reply these queries here under and sharing with youas thesemaybeneficialforall.

Before going through specific query/answer ,please check basic concept of annual let out

value(ALV).

ALV to be calculated as under:

1. Where RC Act applicable

(i)Standard rent under the Rent Control Act; or

(ii)Actual rent received

whichever is higher

2 Where RC Act is not applicable:

(i) Municipal Value or

(ii) Fair Rent or

(iii) Rent Received
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whichever is higher

-----------------------------------

Further If the property was let and was vacant during a part of the year and due to such vacancy the

rent received is less than FMV , then such rent received.

In the case of let out properties, unrealised rent shall be excluded from the rent

received/receivable to arrive at AV (you may checkHouse property at a glance)

===========================================

Qus1.If you going to fill your ITR by efiling mode than there is no need to give any documents than

how income tax department come know that at what date you got possession with registration ?

Ans:Yes ,Return are now annexure less and no document is to be attached with Income tax return .

Not only in casee filing of Income tax returnbut this is also applicable in case ofpaper(manual)

returnfiling .However all the data filed in the Income tax return should be correct as Income tax

department (assessing officer) may call data for verification. Every Year few % of return

are selected for scrutiny of Income by the department . These returns are selected on basis of

criteria set by Department. So while filing return you should keep in mind that your return may come

under scrutiny also.

Qus 2I have two houses and both are rented while I am living in govt quarter so do not get HRA in

salary. In this situation which ITR form need to be fill for ITR ?

Ans.With the given data ,you have to File ITR-2. Income Tax return form ITR-1 (Sahaj ) can be used

where there is income from one House Only.

Qus 3.One house is with my name and other flat is registered with name of myself and my

spouse.In registration share of partnership is not defined. Whole EMIs (of both houses) are paid by

me. Now My wife has started to give coaching, but she is earning only 50000 RS per years and she

is also going to fill ITR from this assessment year. She will not claim any interest benifit. Can I

get interest lost benifit for both houses ? Even my wife is co-applicant in one flat, can I claim 100%

interest loss for that property as I am paying 100 % EMI ? What is method to convey to ITD as I am

going to opt effiling process ? Pl suggest best way in which I get maximum benefits.

Ans.From the Information given by you it is understood that though the Flat in Joint name but the

payment has been(are /will be) paid by you and your wife has not contributed any money in the Flatpurchasing .

As per section 27(i) of the income tax act ,ownership shall be deemed for taxing income from house

property :
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(i)When house property is transferred to spouse (otherwise than in connection with an agreement to

live apart) or minor child (not being a married daughter) without adequate consideration (Section

27(i))

so if house is transferred to wife/Husband without any consideration then Husband/wife remains the

deemed owner of the house and income from house property will be added in transferor's income.

In you case you have given your wife name in flat for your convenience and you have contributed full

money in the flat and you become the deemed owner as per Section 27 of the income tax act . So as

per this Section full(100%) Income from house /Flat is to be added in your income. Income here

means loss also.

So as per explanation given above you can / have to claim full interest of both the houses in your

Income.

Further as your wife is also earning now however you should not take contribution in the house from

her. Let her invest money with her own choice . If you need money for repaying loan then you can

take loan from her that may be without interest.

Qus 4. We could not rented both houses through out 12 month because of 11 month agreement we

are generally doing. So practically we got 10 to 11 month rents. How it can be reflected in ITR form ?

Ans :If due to vacancy , the annual rent received is lower than the expected rent, then the annual

rent realized is taken as the gross annual value. However , this rule will be applicable only if the

decline is only because of the vacancy .As your houses are rented only for 10-11 months so actual

rent received will be the annual value .(read answer 7 also)

Qus 5. I requested to go through the HP(House property) schedule of ITR-2 and suggest how to fill

as per my above situation.

Ans: Read this answer in the end .

Qus 6. Can I get benefit intrest loss of 300000 by both ITR(my & my spouse) as per above situation

?

Ans:The maximum benefit for minus income from Interest on house loan in respect of self occupied

house is Rs 150000 and it is available for one House only . But this restriction is applicable only for

Self occupied House only not on let out house.In present case both houses are let out so as per rule

you can deduct/claim actual interest accrued in the loans accounts without any limit .(check example

for two or more house)

Further as explained above you are deemed owner of the house as per Section 27 so no benefit is

available to your wife .Moreover it is in your overall interest that all the negative house property

income is to be added in your income as it will reduce your overall tax liability and as per rules also

you have to show 100% income from both the houses in your hand.(employer can also adjust loss

from rented property)
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Interest on self occupied house propertydetails available here

House property House loan section 80C repayment benefit

Qus 7. what is notional rent ?

Ans : In respect of a let out house property , the rent received is usually taken as the annual lettable

value. When, however , the rent is not indicative of the actual earning capacity of the house(e.g. incase where the tenancy is affected by manipulation, emer gency , close relationship or such other

consideration), the notional annual value will have to be found and adopted. The standard rent would

be the Annual Value in the case of properties, subject to Rent Control Legislation,.However , when

the actual rent received or receivable is higher than the notional value as calculated above, the

higher figure will be taken for the purpose of Income-tax.

so where the actual rent received has not taken for Income then it is called Notional (not actual)

rent.

Qus 8. As I am not living in my any of the houses could I get benefits 80 C ?

Ans: Yes, 80C benefit is available to you. 80C benefit is available where house loan is taken

from specified institutions ( Banks are covered ) and income of house is covered under "income

from house property".As you have fulfilled the conditions specified under 80C, so you can claim

deduction under section 80C.

Qus 9. What is the meaning of letable value\rent received or rent receivable ? Which is ask in

ITR-2.

Ans :For example, in case of a house, whose municipal valuation is Rs. 24,000/- and actual

rent received is Rs. 36,000/- the annual lettable value will be taken at Rs.36,000/-. If the actual rent

received is Rs. 18,000/- and municipal valuation is Rs.24,000/-, the annual value would be Rs.

24,000/- for the purpose of the Income-tax Act. Here, if the property was vacant for six months and

the rent received is Rs. 18,000/- for six months the Annual Value shall be Rs. 18,000/-

Qus 10. What is the meaning of the amount of rent which can not be realised ? which is shown in

ITR-2 form.

Ans:The amount of rent which can not be realised means Unrealised rent

Unrealised rent (which the owner could not realize/recovered) shall be excluded from rent

received/receivable only if the following conditions are satisfied:

a .the tenancy is bona fide;

b.the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;

c .the defaulting tenant is not in occupation of any other property of the assessee;

d.the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the

unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
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Unrealised rent subsequently recovered would be taxable in the year of receipt. It has been

mentioned earlier that basic requirement for assessment of property income is the ownership of the

property . However , in the cases where unrealised rent is subsequently realised, it is not necessary

that the assessee continues to be the owner of the property in the year of receipt also.

Qus 5. I requested to go through the HP(House property) schedule of ITR-2 and suggest how to fill

as per above situation.

Ans: As a layman some of things are confusing to you so Practically read Annual Value as actual

rent receivable minus rent unrecoverable. Most of these provision Standard rent , Municipal value,

fair value is applicable where person is tried to hide something.

In ITR you should show figures as under.

In case of first property you are 100% legal owner , but in second case you are not legal owner but

deemed owner under income tax act . So in both case show

Is the property co-

owned? NO

Yourpercentage of

share in the

property. 100

1a Annual letable value/ rent received or receivable (higher if let out for whole of the year,

lower if let out for part of the year) : The Rent (amount) received from the let out property

1b The amount of rent which cannot be realized : If there is Bad debts from the rent amount

included in above (a)

1c Tax paid to local authorities : If property tax has been paid during the year irrespective of the

period (amount due can not be deducted actual payment must)

1d Total (1b + 1c) : Auto total

1e Balance (1a1d):Auto total

1f 30% of 1e :Auto calculation

1g Interest payable on borrowed capital :Interest accrued (100%) on house loan . This amount

can not be 150000 in case of self occupied house.But in your case amount is without any limit.

Total (1f + 1g) :Auto calculation

i Income from house property 1 (1e

1h):Automatic total
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Interest on Pre Construction

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Transcript of Interest on Pre Construction