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There are various questions on the allowability of interest on loan paid for House Property like

  • How much deduction of interest will be allowed from House Property?
  • Whether there is any limitation of interest deduction from House Property?
  • Whether limitation of amount is applicable on Commercial Property or on Residential Property?
  • What will happen to the amount of unallowed amount of interest on loans?

After recent updation on this topic, the amount of interest on house property is restricted to Rupees Two Lacs only. As per plain reading of section 24 it appears that such limitation is only for House Property which is self occupied. Section 24(b) reads as below:

24. Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely:

(a) a sum equal to thirty per cent of the annual value;

(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 that in respect of property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees :

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 five years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed two lakh rupees.

Explanation.: Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years:

As First Proviso to section 24(b) refers only those properties which is referred under Section 23(2) which is normally read as Self-occupied house property it appears that limitation of Rs. Two Lacs is only applicable in reference to such property. The relevant text of section 23(2) is reproduced below:

23(2) Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,

the annual value of such house or part of the house shall be taken to be nil.

However, after the introduction of Sub Section 3A to section 71 (which talks about Set off of loss from one head against income from another) effective from 1 April 2018, the inter-head adjustment of loss from house property from other head of income is restricted to only Rs. two lacs. Relevant text of section 71(3A) is reproduced below:

Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Income from house property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.

On a careful reading of above provisions, the following points may be concluded:

The deduction for interest on loan for the self-occupied property shall be allowed only to the extent of Rs. Two Lacs in relevant Assessment year.

The deduction for interest on loan for Rent Out Property shall be allowed as per actual. However, in case there is overall loss from Income from All House Properties in same Assessment Year more than Rs. Two Lacs, the inter-head adjustment for such loss will be restricted to only Rs. Two Lacs.

So What will Happen to the unadjusted Interest on Housing Loan?

The answer will be different for both type of house properties. This may be summed up as below:

1. For Self Occupied Property- As section 24(b) itself restricts the allowance of such interest to Rs. Two Lacs so there can not be any loss from such property for more than Rs. Two Lacs. This loss can be set off with Incomes from Other Heads of Income. Any amount of interest in excess of Rs. Two Lacs will Lapse.

2. For Rent Out Property- First of all, entire interest shall be adjusted with Annual Value of Property and the loss in excess of Rs. Two Lacs shall be carried forward in terms of Section 71B and will be allowed to be set off from Income of upto Next Eight Assessment Years. In case, such loss can not be set off in next Eight Assessment Years then it shall lapse after the expiry of Eighth Assessment Year.


Published by

Ashish Bansal
Category Income Tax   Report

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