Tax Benefit is Available on Home Loan Interest, Even if Unpaid
As a payroll service provider, we verify the supporting documents submitted by employees when they seek tax benefit. If an employee seeks deduction under Section 24 of the Income Tax Act, for the housing loan interest, we typically seek a certificate from the bank/financial institution which presents the loan principal and interest schedule for the year, property construction completion certificate from the builder or employee declaration to that effect, proof of property ownership, etc. What we do not seek from the employee is proof of loan interest payment by way of, say, bank passbook copy.
Is proof of loan interest payment not important?
An employee need not have paid the interest to the bank/financial institution in order to claim tax benefit under Section 24. We find that many payroll managers are under the mistaken notion that an employee should have made the interest payment and the employer should be verifying the same by checking the bank passbook etc. as proof of interest payment.
The employer needs to verify only the total interest payable (not paid), by checking the loan statement from the bank/financial institution. As long as an employee has a valid housing loan, he can claim tax benefit on the interest for the year, whether or not he makes the interest payment to the bank/financial institution.
Why? Because Section 24 says so.
As per Section 24 of the Income Tax Act:
(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed 9[two lakh rupees].
As you can see from the above, Section 24 refers to interest “payable” and not the interest actually paid by an employee. The amount of annual interest payable can be considered for deduction every year. It does not matter whether the interest has been actually paid or not paid during the year.
Circular No. 363, dated 24.06.1983
The Income Tax Department issued a circular (No. 363) in 1983 which deals with an issue pertaining to housing loans provided to central government employees. As per the House Building Advance Rules of the Central Government of India, the recovery of the principal (on housing loan provided to government employees) is made first in not more than 180 monthly installments and then interest is subsequently recovered in not more than 60 installments. This means that while interest on housing loan accrues in the first 180 installments, the deduction/payment of the accrued interest starts only after 180 months.
The circular clarifies that in the period (say, the 1st year of the loan) when interest accrues but is not paid, the benefit under Section 24 is available. According to the circular:
Since the word used is ‘payable’, deduction under section 24(1) (vi ) would be on the basis of accrual of interest which would start running from the date of the drawal of the advance.
House property loan interest, accrued but not deducted/paid, is somewhat unique to loan provided by the government. Employees, when they take a housing loan for property acquisition/construction from banks/financial institutions, will need to pay interest as soon as it falls due. However, even when employees do not pay interest on time, they can claim tax benefit if the interest payment falls due in the year.
Applicability of the circular to non-government employees
While the circular answers a specific question on loans offered by the Central Government, its pronouncement on the matter of interest payable versus paid should be construed as being applicable to all assessees and not just the Central Government employees. Section 24 of the Income Tax Act applies equally to all assessees and there is nothing in law which states that a different text for Section 24 should be used for private sector employees.
This issue has also been settled by the court. In the case of CIT v. Devendra Brothers & Co. 200 ITR 146, the Allahabad High Court has stated that as long as the interest in respect of the housing loan has fallen due, the amount of interest whether it is paid or not would be a permissible deduction. According to the judgement, “if the amount of interest sought to be deducted had fallen due or a liability in that regard had been incurred in the previous years relevant to the assessment year in question, whether factually the amount of interest is paid or not, it is a permissible deduction” under the Income Tax Act in computing the income chargeable to tax under the head “Income from house property”.
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Under Section 24 of the Income Tax Act, 1961, the interest on housing loan would be allowed as a deduction even when the same has not been paid during the year. but if employee not availed this benefit earlier, now can employee avail rebate on interest if he paid interest this financial year?
If the benefit was not used in an earlier year, it cannot be used in a later year. In other words, it is lost forever.
Can the interest which has been paid after finishing payment of the whole principal amount be claimed under section24 for the FY in which the interest has been paid?
The interest benefit for a year is available to the extent of the interest payable (to the housing-loan lender) for that year, subject to the limits specified by Section 24. For example, if the interest payable for the financial year 2016-17 is Rs 1 lakh, the benefit can be claimed to the extent of Rs 1 lakh for the financial year 2016-17. The period of principal repayment has no bearing on the tax benefit available under Section 24.
Can anybody who has not been availing the benefit of Transport allowance and Medical reimbursement claim the Standard deduction proposed in the Budget 2018?
Yes, the standard deduction will be available to everyone.
Please let me know whether the Permanent Conveyance Allowance given to meet the expenditure incurred on conveyance in performance of duties of an office can be claimed as deduction in Income Tax for FY 2018-19
From FY 2018-19 conveyance/transport allowance exemption is available only for differently abled employees. For normal employees, this exemption is not available.
if the email id registered with the IT department is not accessible how can get the profile updated
Iam getting House Building Advance in government in the 40 Lakhs. Paid principal amount monthly 31,000/- (51/130). I may accured interest in Income Tax applicable? or not. Please inform details.
You can claim tax benefit on the interest payable amount for a year.
What happens to the interest which is then due and paid in subsequent years..Will it not become a case of double claiming. And what happens to the principle payment thereafter. How is it treated?
1. Interest benefit, even if paid later, cannot be claimed in later years.
2. Principal benefit should be claimed in the year in which principal is repaid.
If an employer(Proprietor) helps an employee to repay the housing loan, will it be allowed as expense in the hands of Proprietor and as deduction in the hands of employee?
It would be an expense in the hands of the employer and an income in the hands of the employee.
I am a central govt employee and have availed a House Building Advance of Rs. 5.00 lakhs at 8.5% on IBB (Interest Bearing Balance) Method. Since under IBB method, only principal is paid back first and interest is recovered only after full repayment of principal. I have already claimed exemption of interest accrued under section 24 (b) of income tax. Now I have liquidated the entire loan amount and now interest is being deducted from my salary. Can I now claim exemption of interest being actually paid as well.
No, you cannot, since you have already claimed the interest exemption.
I am a bank employee and I have taken housing loan from my bank jointly with my husband.
As in our loan principle is to be paid in 270 months and I interest thereafter in 90 months. Can my husband claim interest payable under section 24.
Yes, he can, provided:
1. He is a joint owner of the property and
2. He pays some or all of the interest.
Yes he is a co owner and repaying the loan but the problem is that in bank staff housing in first 270 months principal is repaid so in the interest certificate the interest payable amount is the amt of total intrest charged/payable during financial year and in interest paid amt is zero. Now his employer is asking that when interest paid is zero how can you claim? Is there any circular which clearly states that in such cases interest payable or interest charged can be claimed?
As per Section 24 of the Income Tax Act, the deduction is available to the extent of “the amount of any interest payable” on the loan. The operative word here is “payable”. Even if the interest is paid at a later point in time, the benefit is available.
Please take at look at our blog post, stated below. I think this addresses your concern.
https://www.hinote.in/tax-benefit-is-available-on-home-loan-interest-even-if-unpaid