Two house properties, pre-construction interest and set off against capital gains (as set, 1961 Act, AY 2017-18)

Assumptions

1. The loan of ₹10,00,000 was used to construct the first house, and it was repaid in full on 31-3-2016 (the English text), so no interest falls in previous year 2016-17 except the share of pre-construction interest.
2. The municipal taxes of both houses were paid by X during the previous year.
3. The housing loan on the second house was taken when it was bought on 1-1-2012, and SBI Housing Finance is a lender named in section 80C(2)(xviii)(c).

First house (let out)

Rent for the year: April and May at ₹25,000 = ₹50,000; June to December, 7 months at ₹28,000 = ₹1,96,000; vacant January to March. Actual rent received = ₹2,46,000.

The sum for which the house might reasonably be expected to let (section 23(1)(a)) is not more than ₹3,12,000, the higher of the municipal value and the fair rent; with the standard rent given, it may be ₹3,00,000. Either way, the house was let for the year and, but for the vacancy, the rent (₹50,000 + ₹28,000 × 10 = ₹3,30,000) would have been above it, while the rent actually received is lower than it because of the vacancy. So the annual value is the rent received (section 23(1)(c)).

Pre-construction interest: the loan ran from 1-4-2013, and the house was completed on 15-10-2015, in previous year 2015-16. Interest for the period before that year, 1-4-2013 to 31-3-2015, is ₹10,00,000 × 12% × 2 = ₹2,40,000. It is deducted, with no part of it allowed under any other provision (none is given), in five equal instalments of ₹48,000, starting with previous year 2015-16 (section 24(b), Explanation); 2016-17 takes the second instalment.

The repairs of ₹39,000 are not deducted: the 30% deduction of section 24(a) is the only allowance for them.

Second house (self-occupied)

The ₹2,00,000 limit applies because the house was bought with a loan taken after 1 April 1999 and the purchase was completed within five years of the end of the year of borrowing (section 24(b), second proviso, in its wording from 1 April 2017). The lender's certificate of the interest payable is taken as furnished, as the third proviso to section 24(b) requires for this higher limit. The municipal taxes of ₹20,000 and the fair rent are not used, as the annual value is nil.

Computation of taxable income

Notes

1. The house property loss is set off in full: the ₹2,00,000 cap on setting off such a loss against other heads (section 71(3A)) applies only from assessment year 2018-19, and here the loss is below it in any case.
2. Section 112(2) gives the Chapter VI-A deductions only against gross total income reduced by the long-term capital gain; here nothing is left, so the principal repayment, which would qualify under section 80C(2)(xviii) (within the ₹1,50,000 limit of section 80C(1) and section 80CCE), gives no deduction. The gain is taxed at 20% (section 112(1)(a)), but for a resident individual only after it is first reduced by any part of the basic exemption limit that his other income leaves unused (proviso to section 112(1)(a)); the question asks only for the taxable income.

If the facts assumed are otherwise

If the loan on the first house was not used for its construction, the ₹48,000 is not deductible: income from that house is ₹1,54,700, the house property loss ₹45,300 and taxable income ₹2,54,700. Reading the Hindi ("was to be repaid" on 31-3-2016) gives the same result only if the loan was in fact repaid on that date. A date fixed for repayment does not show that it was paid: if any of the loan was still outstanding in previous year 2016-17, the interest payable on it for that year would also be deductible from the first house (section 24(b)). If the whole ₹10,00,000 was still owed throughout the year, that interest is ₹1,20,000 at 12%: the first house shows a loss of ₹13,300, the house property loss is ₹2,13,300 and taxable income is ₹86,700. The English text, which says the whole loan was repaid, is followed here.