Deductions from Annual Value on Income From House Property or Rental Income [Section 24] :
(i) There are two deductions from annual value. They are –
(1) 30% of NAV; and
(2) interest on borrowed capital
(1) 30% of NAV is allowed as deduction under section 24(a)
(a) This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
(b) In case of self-occupied property where the annual value is nil, the assessee will not be entitled to deduction of 30%, as the annual value itself is nil.
(2) Interest on borrowed capital is allowed as deduction under section 24(b)
(a) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction.
(b) Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction.
(c) Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion.
(d) Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed, can be claimed as deduction over a period of 5 years in equal annual installments commencing from the year of acquisition or completion of construction.
Illustration
Arvind had taken a loan of Rs 5,00,000 for construction of property on 1.10.2014. Interest was payable @ 10% p.a. The construction was completed on 30.6.2015. No principal repayment has been made up to 31.3.2016. Compute the interest allowable as deduction under section 24 for the A.Y.2016-17.
Solution
Interest for the year (1.4.2015 to 31.3.2016) = 10% of Rs 5,00,000 = Rs 50,000
Pre-construction interest =10% of Rs 5,00,000 for 6 months (from 1.10.2014 to 31.3.2015)= Rs 25,000
Pre-construction interest to be allowed in 5 equal annual installments of ` 5,000 from the year
of completion of construction i.e. in this case, P.Y.2015-16.
Therefore, total interest deduction under section 24 = Rs 50,000 + Rs 5000 = Rs 55,000.
(ii) Deduction in respect of one self-occupied property where annual value is nil
(1) In this case, the assessee will be allowed a deduction on account of interest (including 1/5th of the accumulated interest of pre-construction period) as under –
| (a) | Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital before 1.4.99. | Actual interest payable subject to maximum of Rs 30,000. |
| (b) | Where the property is acquired or constructed with capital borrowed on or after 1.4.99 and such
acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed. |
Actual interest payable subject to maximum of Rs 2,00,000, if certificate mentioned in (2) below is obtained. |
| (c) | Where the property is repaired, renewed or reconstructed with capital borrowed on or after 1.4.99. | Actual interest payable subject to a maximum of Rs 30,000. |
(2) For the purpose of claiming deduction of Rs 2,00,000 as per 1(b) in the table given above, the assessee should furnish a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property.
(3) The ceiling prescribed for one self-occupied property as above in respect of interest on loan borrowed does not apply to a deemed let-out property.
(4) Deduction under section 24(b) for interest is available on accrual basis. Therefore interest accrued but not paid during the year can also be claimed as deduction.
(5) Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated as capital borrowed for acquiring property and interest paid thereon can be allowed as deduction under section 24.
(6) Interest on unpaid interest is not deductible.