Jigar M. Patel
International Tax Attorney
Two interesting queries raised by AM readers on tax deduction for housing loan interest have been covered today. Readers can keep on sending their queries which will be duly addressed in this Column.
Tax Saving Even Without Actual Payment?
Query: I am in need of a housing loan of Rs. 30 lakhs. An institutional loan at 8% would mean adhering to a strict schedule of interest and installment payments and I am toying with the option of availing such loan from my senior citizen father, paying interest to him at a similar rate, since he does not any taxable income. Infact, my father does not have any objection in even granting me accommodation in payments of interest / installments, so as to suit my liquidity convenience. I would like to know if I can avail tax deduction for payments to my father, even if they are not actually paid during the year, but deferred for payment in later years.
Reply: Section 24(b), which provides for deduction of interest on housing loan refers to the term ‘interest payable’ and not ‘interest paid’. Since this deduction is available on ‘accrual basis’, you can claim the benefit of maximum interest deduction of Rs. 2,00,000 and save tax of Rs. 62,400 (at 31.20%), though the interest is not actually paid by you during the year.
You would, however, be well advised to obtain a certificate from your father, specifying the amount of interest payable to him on such loan. Your father can show this interest income of Rs. 2.40 lakhs on accrual basis and on the facts of his case, pay zero tax.
However, as regards the deduction for payment of installments of housing loan under Section 80C, the same is available only in respect of actual repayment and that too if such amount is borrowed from the government, bank, LIC, housing finance institution or an employer being a company, co-operative society, local authority, university or college. Repayment of housing loan installments from a private source, is not eligible for deduction u/s. 80C. You would, therefore, be required to plan other investment options, if you wish to avail the benefit of this deduction.
Deduction on Switching of Housing Loan
Query: I had taken a housing loan of Rs. 40,00,000 from a Housing Finance Company on which interest is payable at 10% per annum. My father who has just received his retirement benefits has offered to give me a loan at 7% interest. If I plan to repay the old loan by taking a fresh loan from my father, can I continue to avail the benefit of deductions for interest paid?
Reply: Your plan of availing of the fresh housing loan at 7% per annum from your father and repaying the original loan at 10% per annum would indeed be smart planning. Along with a clear 3% saving on interest payment, you can continue to enjoy the benefit of deduction even after the switching of loan. In this regard, you usefully rely on the CBDT Circular No. 28 dated 20-8-1969, which clearly directs that, “where a fresh loan has been raised to repay the original housing loan, interest payable on the second loan, would also be allowed as a deduction under Section 24(b).” Your father too, should be quite happy to get a decent return of 7% on the loan advanced by him. A win-win situation for both!
