Interest on borrowed capital under section 24(b): let-out and self-occupied houses (as set, 1961 Act, AY 2016-17)

The deduction in general

Section 24(b) allows the interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct a house property. Points common to both kinds of house:

• The deduction is for interest payable for the year: it is allowed on an accrual basis, whether or not it is paid in the year.
• Only interest is allowed. Repayment of the principal is not a deduction under section 24 (for a residential house it may qualify under section 80C(2)(xviii), which itself leaves out anything allowed under section 24).
• Interest on a fresh loan taken to repay the original loan is also interest on capital borrowed for the property (the third proviso to section 24(b) speaks of such a new loan).
• Section 25 bars the deduction of interest payable abroad where no tax was paid or withheld on it under Chapter XVII-B and nobody in India can be treated as the lender's agent.

Interest for the period before completion

Interest for the years before the previous year in which the house is acquired or constructed (the pre-construction period) is added up, reduced by any part already allowed under another provision, and allowed in five equal instalments: for the year of acquisition or completion and each of the four following years (Explanation to section 24(b)). The instalment for a year is added to that year's own interest.

(i) Let out house property

• The whole interest payable for the year, plus the pre-construction instalment, is deductible. There is no upper limit.
• The loan may be for acquisition, construction, repair, renewal or reconstruction.
• If interest exceeds the net annual value, the result is a loss from house property. For assessment year 2016-17 that loss may be set off in full against income under any other head (section 71(1) and (2)); the ₹2,00,000 cap of section 71(3A) was inserted by Act 7 of 2017 with effect from 1 April 2018 (assessment year 2018-19), so it does not apply to this year. A loss not set off is carried forward for eight years against house property income only (section 71B).

(ii) Self-occupied house property

Where the annual value is nil under section 23(2) (the owner lives in it, or cannot live in it because his work keeps him elsewhere), the deduction is limited by the provisos to section 24(b):

• The limits include the pre-construction instalment.
• The ₹2,00,000 limit is the one in force for assessment year 2016-17: a footnote shows two lakh rupees substituted for one lakh fifty thousand rupees with effect from 1 April 2015. The completion period was three years for this year; five years was substituted only from 1 April 2017.
• For the higher limit the assessee must furnish a certificate from the lender stating the interest payable for the acquisition or construction, or for the new loan that repaid the original one (third proviso to section 24(b)).
• Since the annual value is nil, the interest produces a loss from house property, which may be set off against other heads under section 71.

Summary