Interest on loan or borrowed capital u/s 24(b)
Interest payable on amount borrowed for the purpose of purchase, construction, renovation, repairing, extension, renewal or reconstruction of house property can be claimed as deduction on accrual basis (Circular No. 363 dated 24/6/1983).
For the purpose of calculation, interest on loan is divided into two parts:
(i) Interest for pre-construction period
Meaning: Pre-construction period means the period starting from the day of commencement of construction or the day of borrowing whichever is later and ending on March 31 immediately prior to the year of completion of construction.
Example: X has taken a loan on 1/4/92 for construction of house property. Construction started on 1/4/94 and completed on 17/8/00. In such case, pre construction period will be a period starting from 1/4/94 and ending on 31/3/00.
Treatment: Interest for pre-construction period (to the extent it is not allowed as deduction under any other provisions of the Act) will be accumulated and claimed as deduction over a period of 5 continuous years in equal installments commencing from the year of completion of construction.
(ii) Interest for post-construction period
Meaning: Post-construction period means the period starting from the beginning of the year in which construction is completed and continues until the loan is repaid.
Treatment: It can be fully claimed as deduction in the respective year(s).
a) Interest on borrowed capital is allowed on accrual basis even if the books of account are kept on cash basis.
b) Interest paid on fresh loan, which is taken to repay the original loan (being taken for above-mentioned purpose) shall be allowed as deduction [Circular No. 28 dated 20/8/1969].
c) Interest on new loan, taken for paying outstanding interest on old loan, is not deductible C 23
d) Amount paid as brokerage or commission, for arrangement of the loan, is not deductible. [Circular No. 28 dated 20/8/1969]
Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.