Interest on borrowed capital

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This query is : Resolved

K. R. Singhal (Querist)

30 April 2009 Income Tax Deduction under Section 24

Following two deductions are available under section 24:
(i) Standard deduction
(ii) Interest on borrowed cpital

Please note that no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary, salary of liftman etc.

Standard deduction

30% of the net annual value of the property.

Interest on borrowed capital

Interest on borrowed capital is allowable as deduction on accrual basis if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. Interest on borrowed capital is deductible up to Rs. 1,50,000.

Interest on pre-construction period: Interest payable by an assessee in respect of funds to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other provision of the Act, will be deducted in five equal instalments, commencing from the previous year in which the house is acquired or constructed.

What is pre-constructed period?
Interest of pre-constructed period is deductible in five equal instalments. The first instalment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose “pre-constructed period” means the period commencing on the date of borrowing and ending March immediately prior to the date of completion of construction / date of acquisition or repayment of loan, whichever is earlier.

Now I take a case.

Date of borrowing commencing on 09 June 2008.
Date of completion of construction – 17 Feb 2009 (as per occupancy certificate issued by Village Panchayat)
Date of acquisition – 21 March 2009 (possession of the flat taken from the builder)
Date of repayment of loan will start from April 2009.

Accordingly, pre-constructed period means date of borrowing (9 June 2008) to 31 March 2008 (ending March immediately prior to the date of completion of construction / date of acquisition or repayment of loan, whichever is earlier).

In this case interest of pre-constructed period is nil, since there is no interest applicable for the period from 9 June 2008 to 31 March 2008 (as this is the date prior to the loan). Accordingly, as per my opinion, full amount of interest paid during the financial year 2008-2009 is deductible as amount of interest on borrowed capital.

Am I correct? Please guide with your expert opinion.