I am taking a home loan to buy my first home. Can I claim exemption on total interest paid (instead of the Rs.1.5 lakh limit) by giving this house on rent?
The mechanism and the quantum of deduction towards interest on housing loan depends on whether the house property is actually used for self residence or let out.
If you let out the residential property, firstly the rental value from the said property should be offered to tax as per section 23 of the Income-tax Act. You could claim deduction towards municipal taxes paid during the relevant financial year (FY) and a flat deduction of 30% of the annual value (after deduction of municipal taxes) towards repairs against the rental value. Further, you could claim the entire interest paid as a deduction against the rental value to arrive at net taxable income from house property. As against this, if the property is treated as self-occupied, then the annual value shall be considered nil. In such a case, you could avail a deduction towards interest on loan up to Rs.1.5 lakh per financial year.
Please note that if you invest in a residential property, which is under construction, then the deduction towards interest can be claimed from the FY in which the construction of the property is completed. In such a case, the interest paid for the period prior to FY in which the construction of the property is completed shall be deductible in five equal annual instalments commencing from the FY in which the construction of the property is completed.
I had given a loan of Rs.20 lakh to a friend through cheque to help fund his proprietary business. I did not provide any documentation for the loan and it was given at 8% interest. How should I show this when I file my tax returns? What will the tax treatment be like?
In case of individuals having income from business or profession and who are mandatorily required to maintain books of accounts as per the provisions of the Act, loan transactions need to be reported as a balance sheet item, not specifically in the return form. Otherwise, there is no such requirement under the Income-tax Act to disclose any loan/advance granted by an individual during the FY.
The interest earned on the aforesaid loan shall be taxable either as “income from other sources” or “business income” as applicable. It is advisable to have a proper documentation to substantiate legitimacy of the loan transactions and interest payment. Documentation is also required to be maintained from a commercial stand point in the unforeseen event of non-repayment of loan as it would help in claiming the same.
From the recipient’s (your friend) point of view, in the absence of appropriate documentation, the entire transaction may be treated as undisclosed income by the tax authorities.
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