Deduction for interest under section 24(b), and unrealised rent (as set, 1961 Act, AY 2019-20)

(i) Deduction under section 24(b)

1. What is deductible. Where a house property has been acquired, constructed, repaired, renewed or reconstructed with borrowed money, the interest payable on that money is deducted from its net annual value (section 24(b)). It is allowed on the accrual basis (interest payable, whether paid or not). Repayment of the principal is not deductible here, and neither is interest on fresh borrowing to pay off interest.
2. Pre-construction interest. Interest of the period before the previous year in which the house is acquired or construction is completed is added up and deducted in five equal instalments: one-fifth in the year of completion and one-fifth in each of the next four years (Explanation to section 24(b)). Interest already allowed under any other provision is left out.
3. Let-out house. The interest of the year plus the instalment of pre-construction interest is deductible in full, with no upper limit; it can produce a loss under the head.
4. Self-occupied house (annual value nil under section 23(2)):
   • the deduction cannot exceed ₹30,000 (first proviso to section 24(b));
   • it can be up to ₹2,00,000 where the money was borrowed on or after 1 April 1999 to buy or build the house and the purchase or building is finished within five years after the close of the financial year of the borrowing (second proviso). The five-year period replaced three years from 1 April 2017, so it governs assessment year 2019-20;
   • for the higher limit, the assessee must furnish a certificate from the lender stating the interest payable (third proviso);
   • interest on a loan for repairs or renewal of a self-occupied house stays within ₹30,000.
5. Interest paid outside India. Interest chargeable under the Act and payable outside India is not deducted if tax on it has been neither paid nor deducted under Chapter XVII-B and there is no person in India who may be treated as the payee's agent under section 163; interest on a loan issued for public subscription before 1 April 1938 is outside this bar (section 25).

(ii) Unrealised rent

1. In the year it is not realised. The actual rent received or receivable, used to fix the annual value of a let-out house under section 23(1)(b) and (c), does not include rent the owner cannot realise (rent payable but not paid, and so proved to be lost and irrecoverable), subject to the conditions laid down by the Rules (Explanation to section 23(1)). The conditions are, in short, that the tenancy is genuine, the defaulting tenant has left or steps have been taken to make him leave, he does not occupy another property of the owner, and the owner has taken all reasonable steps to institute legal proceedings to recover the rent, or satisfies the Assessing Officer that such proceedings would be useless (Income-tax Rules, 1962, rule 4, as substituted by the Income-tax (8th Amendment) Rules, 2001 (CBDT Notification No. 198/2001), in force from assessment year 2002-03).
2. When it is realised later. Unrealised rent recovered later from a tenant is income from house property of the financial year in which it is realised, whether or not the assessee then still owns the property (section 25A(1)), and 30% of it is deducted (section 25A(2)); no other expense is allowed against it. Section 25A in this form applies from 1 April 2017.

Example (our own figures)

A flat is let for ₹20,000 a month; its expected rent is ₹2,10,000. In 2018-19 the tenant stays the whole year but pays for only eight months, then vacates, and the four months' rent of ₹80,000 meets the conditions for unrealised rent. Rent received or receivable, after excluding it, is ₹1,60,000, less than the expected rent, so the gross annual value is ₹2,10,000. Had the owner borrowed ₹10,00,000 at 9% for the flat, interest of ₹90,000 would be deductible in full, the flat being let. If ₹50,000 of the unrealised rent is recovered in 2020-21, ₹35,000 (₹50,000 less 30%) is taxed in that year.