Partial Disbursement of Home Loan and Tax Benefits
To understand the tax treatment of getting exemptions under home loan that have been partially received or disbursed by the bank, it is necessary to understand the issue in conjunction with the provisions of section 24 (b) and section 80C of the Income Tax Act. Any interest that is paid for a home loan can be treated as an ‘expense’ under the head ‘Income from house property’ and deductions can be claimed from the total income, as per the provisions of section 24(b). It is important to know that maximum permissible deduction that can be claimed under this section is one lakh fifty thousand only per annum.
There will be some instances where a portion of the loan sanctioned is disbursed by the bank when the construction of the house is taking place. This will be dealt with in a slightly different manner. Any portion of the interest that is paid out before the completion of construction of the house will not be admissible for deduction in the year it is paid out or in the years prior to completion of house. However, when the construction has been completed the assessee will then be able to claim the deduction for the interest paid, in five equal installments. The rate at which the claim will be admissible is one-fifth of the total amount that is being claimed as deduction, as interest paid. This can be done for the next five years succeeding the year of completion of the construction. It is also to be noted that the upper limit for deduction on this count will still remain one lakh fifty thousand rupees.
To elucidate the above if we consider that Mr A has paid an interest amount of forty thousand rupees for the amount given by the bank during the year 2011-2012 when construction was in progress and the house got completed in the year 2012-2013 then Mr A will be in a position to start claiming deduction at the rate of eight thousand from the year 2012-2013. The arrangement to get loan disbursement in parts can lend prudence to the way an assessee makes arrangement to receive the loan amount. This is so because if the assessee receives the total loan amount at one go then in this case Mr A would lose benefits under Section 80C which he otherwise would have been able to claim for the principal amount that has been paid. Principal repayment deductions can be claimed only after the construction has been completed.
It will also be important to remember that the maximum deduction that can be admissible is one lakh rupees under section 80 C and one lakh fifty thousand rupees under section 24 (b). While there is provision to claim deductions for interest amount paid prior to completion there is no such avenue in case of the principal amount. Timing of the loan or getting the money is important later the portion that is received over a period of time becomes important, if one is looking to get the maximum benefits .