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Treatment of Pre-acquisition/Pre-construction Period Interest

Meaning of ‘Pre-acquisition / pre-construction period’. It means the period starting from th date of borrowing and ending on March 31st immediately preceding to the year of completion of construction/acquisition.

For example, Mr. A has taken a loan on 1-4-20 10 for construction of a house and the construction was completed on 1-07-2012.

In this case, pre-construction period shall be the period starting from 1-04-2010 and ending on 31-3-2012. –

Important point. The period from 1-04-2012 to 30-06-12 shall not be included in the preconstruction period.

Tax treatment. Interest for pre-acquisition/pre-construction period shall be allowed as deduction in 5 equal installments starting from the previous year in which the house is acquired or the construction is completed and for the next 4 previous years.

Important point. If the construction/acquisition of house is completed during a particular previous year then whole interest of that previous year shall be treated as post-construction period interest. In other words, no part of that previous year’s interest shall be treated as ‘pre-acquisition period interest’.

Date of loan                                                               =1-4-2010
Date of completion of construction                        =30-6-2012
Annual interest                                                          =
`50,000
Current previous year                                              = 2013-14

 

Calculate Pre-acquisition and Post-acquisition  Period interest for Previous Year 2013-2014.
 
Calculate Pre-acquisition and Post-acquisition  Period interest

Note. If the whole or any part of pre-acquisition / construction period interest is claimed as deduction under any other provision of the Act then that much interest shall not be allowed as deduction under the head house property.

Other Important Points

(i) Basis of allowability. Interest on housing loan is allowed as deduction on accrual basis. Thus, interest accured/outstanding at end of the previous year is also allowed as deduction for that previous year. Even if an assessee maintains books of accounts on cash basis, the interest on housing loan shall be allowed as deduction on accrual basis.

(ii) Loan taken to repay the original loan. Interest on new loan taken to repay the original housing loan is also allowed as deduction.

(iii) Interest on delayed payment of interest. It is not allowed as a deduction.

(iv) Who may be lender? Housing loan may be taken from any lender, i.e., the lender may be a bank or any financial institution, or any company, or any friend or relative of the assessee or any other person.

(v) Interest payable outside India (Section 25). If interest on loan is payable outside India then deduction shall be allowed only if tax is deducted at source out of such interest. In other words, if interest is paid without deduction of tax at source then it shall not be allowed as deduction. However, the requirement of TDS is not necessary if there is any person in India who may be treated as an agent of the lender u/s 163 (who is outside India) in respect of such interest.

(vi) Applicability of Maximum limit. In case of self-occupied house property, the maximum limit of interest is in respect of both pre-acquisition period interest and post-acquisition period interest.

(vii) Loan taken to repay outstanding interest on old housing loan. Interest on such new loan is not allowed as deduction.

(viii) Interest on loan shall be allowed on deduction out of the Net annual value of the house for which the loan has been taken. Thus, interest on loan taken for house A shall not be allowed as deduction out of net annual value of house B.

(ix) Interest on money borrowed for the payment of municipal tax etc. is not allowed as deduction.
Interest on Housing Loan
 
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