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This article will help you understand the deductions available for the interest and the principal repayment on a home loan taken from non-specified banks, friends or relatives.
The CBDT notifies Form 12BBA, a declaration form, to be submitted by the eligible senior citizens to the specified banks to take relief from filing the ITR.
Union Budget 2021 Outcome:
It has been proposed to exempt senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce that banks deduct tax on senior citizens of more than 75 years of age who have a pension and interest income from the bank.
The maximum tax deduction of Rs 2 lakh is available for The payment of interest on a housing loan. If the interest paid (or payable) is less than Rs 2 lakh, the deduction for the amount will be available. The tax benefit is available even if the loan is taken for repair and reconstruction of the house. This deduction is restricted to Rs 30,000.
The deduction for the interest repayment is available only after the construction of the house is completed or its possession is received. Many loan agreements specify the repayment of interest starting from the month in which the loan is taken. If the construction has just begun, one can’t claim the interest repaid till the construction is completed. In that case, all the interest paid before the completion of construction is available as a deduction in 5 equal installments.
Interest repayment for a home loan taken from friends, relatives or any money lender can be claimed as a deduction under section 24.
The Income Tax Act, 1961 does not specify that this deduction will be available only if the loan is taken from specified banks.
A deduction of Rs 1.5 lakh can be claimed under Section 80C for the repayment of the principal of a loan taken for the purchase or the construction of a new house only. This limit is inclusive of all the investments and expenditures eligible for deduction under Section 80C like Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Scheme (ELSS). The deduction is available only if the loan is taken from banks, Life Insurance Corporation (LIC), or other notified institutions. The deduction is only for the repayment actually made.
Thus, repayment of the principal on a loan taken from friends, relatives or any money lender can’t be claimed as a deduction under this section.
For Example: “Mr. Akash purchases a house for Rs 20 lakh. He took a loan from his friend Mr. Vasanth for the purchase of this property. The loan is repayable in 20 equal installments with an interest of Rs 5% per annum. He repaid a principal of Rs 1 lakh and an interest of Rs 1 lakh for the financial year 2016-17.”
“Mr. Akash is eligible for a deduction under Section 24 for interest repayment of Rs 1 lakh. He can’t claim a deduction under Section 80C for the principal repayment as the deduction is not available for the repayment of the loan from friends.”