Understanding Home Loan Interest Deduction from Income Tax Act

When it comes to home loan interest deductions, it’s crucial to grasp the specific regulations to ensure you can make the most of the benefits available under Section 24(b) of the Income Tax Act. Let’s delve into the details to understand when and how this deduction can be availed.

Pre-Construction Interest

During the construction phase of the property, the interest paid on a home loan is referred to as ‘pre-construction interest.’ It’s essential to note that this deduction isn’t immediately applicable as the interest accrues. Instead, it can be claimed in five equal instalments, commencing from the financial year in which the construction of the property is completed, and possession is taken. Deduction on Interest on borrowed capital under section 24(b) is contingent upon the completion of construction. However, interest payable for the period preceding the year of property acquisition or construction can be claimed over a five-year period, starting from the year of acquisition or completion of construction. The construction must be completed within five years from the end of the financial year in which the home loan was obtained.

Conditions for Claiming Deduction

It’s important to emphasize that this deduction becomes applicable only when the property’s construction is completed or possession is taken. Notably, it cannot be claimed during the construction phase. To claim this deduction, it’s imperative to ensure that the property’s construction is completed within five years from the end of the financial year in which the loan was acquired. Failing to meet this condition reduces the deduction limit to Rs 30,000 instead of Rs 2 lakh.

Cap on Interest Deduction

Under Section 24(b) of the Income Tax Act, the total deduction for interest, including both regular annual interest and pre-construction interest, is capped at Rs 2 lakh per annum for self-occupied properties. However, for let-out properties, there’s no upper limit on the interest deduction. It’s worth noting that under the new tax regime, no deduction is allowed under section 24(b) for self-occupied property. A deduction is allowed under Section 24(b) without any limits for let-out property, regardless of the tax regimes.

Key Considerations and Conclusion

In conclusion, it’s crucial to maintain proof of interest payments during the construction phase to successfully claim this deduction. Seeking guidance from a tax advisor for accurate calculation and effective tax planning around these regulations is highly recommended. Understanding the nuances of home loan interest deductions under Section 24(b) of the Income Tax Act is essential for every taxpayer aiming to optimize their tax benefits while ensuring compliance with the prevailing regulations.