December 02, 2013

CA-CS-ICWA-TAX PROFESSIONALS PORTAL - TDS on salary – full concept – with example - Part Three -Deduction of Interest under House property - Section 24 (b)



TDS on salary – full concept – with example


 CLICK HERE FOR PART - 4

Part 3: - Deduction of Interest under House property -  Section 24 (b)

Applicability: -

a.    An employee owned a house property (let out or self occupied)

b.    The property is not in use for any business activity by the employee

c.     An employee has taken loan for the purpose of acquisition, construction, repairment, renewal or reconstruction of such owned house property

Limits of maximum interest allowed as deduction under section 24(b): -

Loan Taken
Self Occupied
Let Out
For Repair or Renewal
Rs 30,000 p.a
Rs 30,000 p.a
For Acquisition or construction of the house
Before 1.4.99 – Rs 30,000 p.a

After 1.4.99 – Rs 1,50,000


No maximum limit is provide under the law

Note: - Such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed




Example 1: - House property is self occupied

House loan taken
To purchase property
On 10-11-2011
Rs 1,00,00,000
Interest rate 10%
Rs 10,00,000 (assumed)

Solution: -
Deduction allowed under section 24(b)
Interest Paid @ 10%
Rs 10,00,000
Maximum interest allowed under law
Rs 1,50,000

Hence deduction of interest under section 24 (b) Rs 1,50,000 only.


Example 2: - House property is self occupied

House loan taken
To purchase property
On 01-04-2010
Rs 1,20,00,000
Annual Installment
Rs 15,00,000 (of principal only)
Interest rate 10%
Of the principal amount

Solution: -

Principal
Amount
On 1-4-2010
Rs 1,20,00,000
Less : Ist Installment for 2010-11
(Rs 15,00,000)
Balance on 1-4-2011
Rs 1,05,00,000
Less : Ist Installment for 2011-12
(Rs 15,00,000)
Balance on 1-4-2012
Rs 90,00,000
Less : Ist Installment for 2012-13
(Rs 15,00,000)
Balance on 1-4-2013
Rs 75,00,000
Less : Ist Installment for 2013-14
(Rs 15,00,000)
Balance on 31-03-2014
Rs 60,00,000

Assumed interest is calculated after the payment of principal

Deduction allowed under section 24(b)
Interest Paid @ 10%
60,00,000*10%
Rs 6,00,000
Maximum interest allowed under law
Rs 1,50,000

Hence deduction of interest under section 24 (b) Rs 1,50,000 only


Example 3: - House property is self occupied and not constructed in three years


House loan taken
To construct property
On 01-04-2009
Rs 2,40,00,000
Annual Installment
Rs 20,00,000 (of principal only)
Interest rate 10%
Of the principal amount
House property constructed on
31.01.2014

Solution: -

Principal
Amount
On 1-4-2009
Rs 2,40,00,000
Less : Installment for 2009-10
(Rs 20,00,000)
Balance on 1-4-2010
Rs 2,20,00,000
Less : Installment for 2010-11
(Rs 20,00,000)
Balance on 1-4-2011
Rs 2,00,00,000
Less : Installment for 2011-12
(Rs 20,00,000)
Balance on 1-4-2012
Rs 1,80,00,000
Less : Installment for 2012-13
(Rs 20,00,000)
Balance on 1-4-2013
Rs 1,60,00,000
Less : Installment for 2013-14
(Rs 20,00,000)
Balance on 31-03-2014
Rs 1,40,00,000

Assumed interest is calculated after the payment of principal

To Claim deduction of Rs 1,50,000 the condition (house must be constructed within three years) must be satisfied. Otherwise deduction will be limited to Rs 30,000 only instead of Rs 1,50,000.

Deduction allowed under section 24(b)
Interest Paid @ 10%
1,40,00,000*10%
Rs 14,00,000
Maximum interest allowed under law
(as property is not constructed within 3 years)
Rs 30,000

Hence deduction of interest under section 24 (b) Rs 30,000 only



Pre Construction Interest: -

As per Section 24(b) ““Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal installments for the said previous year and for each of the four immediately succeeding previous years:]””

Applicability: -

Loan taken for Construction
Loan taken for purchase
a.    For the period before house is constructed
b.    Interest of such period is summed up and deducted in 5 equal installments
a.    For the period before the house is under acquisition of person
b.    Interest of such period is summed up and deducted in 5 equal installments

Meaning: -

a.    Deduction of interest is allowed only from the year when the house is fully constructed or has been acquired
b.    No deduction of interest for the period when the house property is under construction or not in acquisition.


Example 1: -

House loan taken
To construct property
On 01-04-2011
Rs 15,00,000
Annual Installment
Rs 1,00,000 (of principal only)
Interest rate 10%
Of the principal amount
House property constructed on
31.01.2014

Solution: -

a.    House is constructed with in 3 years

b.    Deduction of interest will be allowed from the year 2013-14 only, as house is constructed only in 2013-14 only

c.     Interest paid before 2013-14 will be treated as pre construction interest , will be allowed in 5 equal installment

Principal
Amount
Interest
Balance on 1-4-2011
Rs 15,00,000
Less : Installment for 2011-12
(Rs 1,00,000)
For 2011-12
14,00,000*10% = 1,40,000
Balance on 1-4-2012
Rs 14,00,000
Less : Installment for 2012-13
(Rs 1,00,000)
For 2012-13
13,00,000*10% = 1,30,000
Balance on 1-4-2013
Rs 13,00,000
Less : Installment for 2013-14
(Rs 1,00,000)
For 2013-14
12,00,000*10% = 1,20,000
Balance on 31-03-2014
Rs 12,00,000

a.    House is constructed in 2013-14 (31.01.2014) hence interest paid on 2013-14 will be allowed in 2013-14

b.    Interest paid prior to the period 2013-14 will be considered as pre construction interest


In simple meaning: -

Pre Construction period:-

From the date of Loan taken i.e. 1-4-2011
TO
The previous year to the year when house is constructed (house constructed on 31-01-2014 hence previous year is 31-03-2013)
So period of pre construction is 1-4-2011 to 31-03-2013)

Amount of Pre Construction interest is Interest for 2011-12 and 2012-13 i.e. Rs 2,70,000  (1,40,000+1,30,000)

Which is allowed in 5 equal Installments starting from the year of construction

Deduction of Pre Construction Interest Allowed as: -

Year
Details
Amount
2013-14
Year of Construction
270000/5
Rs 54,000
2014-15
270000/5
Rs 54,000
2015-16
270000/5
Rs 54,000
2016-17
270000/5
Rs 54,000
2017-18
270000/5
Rs 54,000

Deduction allowed under section 24(b)
Interest Paid @ 10%
12,00,000*10% = 1,20,000

Add: - Pre Construction Interest
i.e. Rs 54,000
Rs 1,74,000
Maximum interest allowed under law
Rs 1,50,000

Hence deduction of interest under section 24 (b) Rs 1,50,000 only


Example 2: -

House loan taken
To construct property
On 01-04-2012
Rs 10,00,000
Annual Installment
Rs 1,00,000 (of principal only)
Interest rate 10%
Of the principal amount
House property constructed on
31.01.2014


Solution: -

a.    House is constructed with in 3 years
b.    Deduction of interest will be allowed from the year 2013-14 only, as house is constructed only in 2013-14 only and not before
c.     Interest paid before 2013-14 will be treated as pre construction interest , will be allowed in 5 equal installment

Principal
Amount
Interest
Balance on 1-4-2012
Rs 10,00,000
Less : Installment for 2012-13
(Rs 1,00,000)
For 2012-13
9,00,000*10% = 90,000
Balance on 1-4-2013
Rs 9,00,000
Less : Installment for 2013-14
(Rs 1,00,000)
For 2013-14
8,00,000*10% = 80,000
Balance on 31-03-2014
Rs 8,00,000


a.    House is constructed in 2013-14 (31.01.2014) hence interest paid on 2013-14 will be allowed in 2013-14
b.    Interest paid prior to the period 2013-14 will be considered as pre construction interest


In simple meaning: -

Pre Construction period:-

From the date of Loan taken i.e. 1-4-2012
TO
The previous year to the year when house is constructed (house constructed on 31-01-2014 hence previous year is 31-03-2013)

So period of pre construction is 1-4-2012 to 31-03-2013

Amount of Pre Construction interest is Interest for 2012-13 i.e. Rs 90,000 

Which is allowed in 5 equal Installments starting from the year of construction 2013-14

Deduction of Pre Construction Interest Allowed as: -

Year
Details
Amount
2013-14
Year of Construction
90,000/5
Rs 18,000
2014-15
90,000/5
Rs 18,000
2015-16
90,000/5
Rs 18,000
2016-17
90,000/5
Rs 18,000
2017-18
90,000/5
Rs 18,000

Deduction allowed under section 24(b)
Interest Paid @ 10%
8,00,000*10% = 80,000

Add: - Pre Construction Interest
i.e. Rs 18,000

Rs 98,000
Maximum interest allowed under law
Rs 1,50,000

Hence deduction of interest under section 24 (b) Rs 98,000 only




By CA Ashish Barthwal


If have any query: - contact ca_ashishbarthwal@yahoo.com
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