Interest on borrowed capital is allowed as a deduction while computing income or loss under the head ‘Income from House Property’. The relevant provisions are contained under Section 24 of the Income Tax Act.
In the case of a self-occupied house, a normal deduction of Rs 30,000 is allowed towards interest on borrowed capital. However, a deduction on account of interest up to a maximum limit of Rs 1.5 lakhs is available in case the loan has been taken on or after April 1, 1999.
The loan must have been taken to construct or acquire a house. In addition, the construction or acquisition of the residential unit with the loan should have been completed within three years from the end of the financial year in which capital has been borrowed. The higher deduction is not allowed towards interest on capital borrowed for repairs or renovation of an existing house.
In order to claim the higher deduction you should furnish a certificate from the bank to which the interest is payable. It should specify the amount of interest payable. The loan should be for the construction or acquisition of a house.
The essential conditions necessary to avail the higher deduction of Rs.1.5 lakhs are:
The amount must have been borrowed on or after April 1, 1999
The acquisition or construction of a house must have been completed within three years from the end of the financial year in which the amount was borrowed
There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the house could have commenced before April 1, 1999, but, as long as its construction or acquisition is completed within three years from the end of the financial year in which the capital was borrowed, the higher deduction will be available.
It should also be noted that there is no stipulation regarding the construction or acquisition of a residential unit being entirely financed by capital borrowed on or after April 1, 1999. A loan taken prior to April 1, 1999 will carry deduction of interest up to Rs 30,000 only. However, in any case, the total amount of deduction on interest on borrowed capital will not exceed Rs.1.5 lakhs in a year.
The interest is deductible in five equal installments commencing from the previous year in which the house has been acquired or constructed. The first installment is deductible in the year in which the construction of the property is completed or it is acquired, and the balance four installments in the four subsequent years.
The interest is allowed as a deduction on accrual basis - on due basis, even if it has not actually been paid during the year. The essential condition is that the assessee should borrow the money, and the interest should be payable on the borrowed capital. The money can be borrowed for construction of property, acquisition of property, repair or reconstruction of property.