Interest on borrowed capital is allowed as deduction under section 24(b)

Interest on borrowed capital is allowed as deduction under section 24(b)

If any assessee has taken a loan or advance for purchase/ construction / renovation / addition / alteration / substitution or repair etc. of the house property, interest on such loan shall be allowed to be deducted under section 24(b) from NAV and interest is allowed on due basis but only simple interest is allowed i.e. interest on interest is not allowed.

The  assessee  can take any number of loan. Interest for the year for which income. is being computed shall be allowed in the same year and shall be called current period interest. Interest for the period prior to the year in which the house was purchased or. constructed shall be called prior  period  interest  and  such  interest  shall  be  allowed in 5 annual equal installments starting from the year in which the house was purchased or constructed.

E.g. If Mr. X had taken a loan of Rs.5,00,000 for construction of property on 01.1 0.2016 and interest is payable @ 10% p.a. and the construction was completed on 30.06.2017, in this case interest allowed
under section 24(b) shall be:

Interest for the year (01.04.2017 to 31.03.201 8) = 10% of Rs.5,00,000 = Rs.50,000

Prior period interest =10% of Rs.5,00,000 for 6 months (from 01.10.2016 to 31.03.2017)=Rs.25,000

Prior period interest to be allowed in 5 equal annual installments of Rs.5,000 from the year of completion of construction i.e. in this case, P.Y.2017-18.

Therefore, total interest deduction under section 24(b) 50,000 + 5000 = Rs.55,000.

If any assessee has taken a new loan to repay the original loan, in such cases interest for such new loan shall be allowed in the similar manner.

As per section 25 if loan is taken from outside India, in that case also interest is allowed but the person making payment of interest should deduct tax at source or the person receiving interest should have an agent in India.

Demo Classes of Tax by Prof. Vinit Sir:

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