Rent income

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

11 August 2013 Dear Sir,

A person is constructed a Godown and give this godown into rent. Rent Rs. 400,000 received & Rs. 40,000 TDS deducted.

For construction purpose loans has been taken from relatives & Interest Rs. 108,000 @ 12% is given.

Can we clam this interest as expense under the head House Property.

If we show this income in Income from other sources - Rent from Building (Building cost is Rs. 18 Lacs) what will be the best option to save tax.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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11 August 2013 There is not another option to show the income under the head IFOS.
.
The Income has to be shown under the best option available and the same is IFHP.
.
You can deduct interest on capital borrowed
for the purpose of construction of the property.
.

Querist : Anonymous

Querist : Anonymous (Querist)

14 August 2013 Thank you sir,
If assessee is not repay this loan and interest every year is consistently increasing, is it any problem to claim the interest. Is any problem to take loan from relatives

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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21 July 2025 In your case, the person has constructed a godown (warehouse) and has rented it out, receiving Rs. 4,00,000 as rent, with TDS of Rs. 40,000 deducted, and paying interest of Rs. 1,08,000 on loans taken from relatives.

Let’s address each of your key concerns in a clear and structured way:

✅ 1. Under Which Head Should the Income Be Shown?
Answer: The rental income from letting out a building must be shown under the head "Income from House Property (IFHP)", not "Income from Other Sources (IFOS)".

Explanation:

According to the Income Tax Act (India), rent received from letting out a building (even if it is a godown or warehouse) is taxable under "Income from House Property", provided the person is not running any business from it.

It is not correct to show this income under "Income from Other Sources" unless the letting is inseparable from other services (which is not the case here).

✅ 2. Can Interest Paid to Relatives Be Claimed as a Deduction?
Answer: Yes, interest on loan taken from relatives for the purpose of constructing the godown can be claimed as a deduction under Section 24(b) of the Income Tax Act.

Conditions:

The loan must be used only for construction or purchase of the property.

Interest can be claimed whether the loan is taken from a bank or a relative — there's no restriction on the lender being a relative.

Maintain proper documentation (loan agreement, payment proofs, etc.).

✅ 3. What Happens if Interest Keeps Increasing and Loan Is Not Repaid?
Answer:

Interest can still be claimed on an accrual basis, even if not actually paid, provided the liability is genuine.

However, if the interest keeps increasing each year and the loan is never repaid, the Assessing Officer may question the genuineness of the transaction.

To avoid problems:

Document the loan properly (date, amount, terms, rate of interest).

Make some repayments periodically, even partial, to show bona fide intent.

✅ 4. How to Save Tax?
Under "Income from House Property":

Gross Annual Value (GAV): ₹4,00,000

Less: Municipal Taxes: (if any, not mentioned here)

Net Annual Value (NAV): ₹4,00,000

Less: Standard Deduction @ 30%: ₹1,20,000

Less: Interest on borrowed capital: ₹1,08,000

Taxable Income from House Property: ₹1,72,000

This is much more beneficial than showing income under "Income from Other Sources" because:

Under IFOS, you cannot claim the 30% standard deduction.

Also, interest on borrowed capital is generally not allowed under IFOS for such cases.

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