Pre-construction interest can be deducted even if you pre-pay the loan

You could claim this deduction even if you have foreclosed the housing loan


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Can I can claim the pre-construction interest on a home loan in five equal annual instalments, even if I prepay and foreclose the loan within a year after getting possession? For example, can I claim pre-construction interest expense of say Rs5lakh during 5 years of construction in next 5 years after possession, even if I fully prepay and foreclose the loan within a year of possession? Also, does the tax rule still mention mandatory possession within 3 years or is it extended to 5 years now?

—Urvil Modi

The pre-construction interest incurred on a housing loan is allowed as a deduction in five equal instalments, beginning from the financial year (FY) in which the property has been completely constructed. The allowability of interest is not linked to the existence of the housing loan in each of the five FYs when the deduction is being claimed. But you can claim deduction only if you continue to own the property in each of the said FYs.

Hence, assuming your property construction is completed in the current FY (i.e. FY 2017-18), the pre-construction interest paid by you until 31 March 2017 can be claimed in five equal instalments until the FY 2021-22. You could claim this deduction even if you have foreclosed the housing loan immediately after getting possession.

Further, as per current tax laws, there is a cap of Rs2 lakh per annum on the interest that can be claimed in each FY in respect of a self-occupied property (SOP). In case of an under-construction self occupied property, this cap was reduced to Rs30,000 per annum if the construction of the property is completed beyond 5 years from the end of the FY in which the loan was borrowed. This time period for completion of construction is 3 years, in respect of properties acquired before 1 April 2016. There is neither a cap nor a stipulation of the number of years within which construction has to be completed or the amount of interest, where the property is let out. So, in case of a rented property, the full interest (including the 1/5th instalment for pre-construction period interest) can be claimed as a deduction from the rental income from the said property.

If the said computation under the head—house property (after computing and adjusting income/ losses from all house properties owned by the individual)—is a loss, the same can be set off against other income of the individual (except specified capital gains). Further, from FY2017-18, such set-off of loss from house property against other permissible heads of income can be done only up to Rs2 lakh per annum, irrespective of whether the property/properties is/are SOP or let-out or deemed to be let out. Any unadjusted house property loss thereafter can be carried forward and set off against house property income only for up to eight successive FYs.

I was an employee of private sector bank and had an Employees’ Provident Fund (EPF) account. My EPF contribution was for more than 5 years in the same organization. Recently, I resigned and joined an organization that allows NPS contribution only, so I can’t transfer the old EPF balance to NPS account. Now, I have to withdraw the from the old EPF account. In case of withdrawal, do I need to include it as my income and do I need to pay tax on this amount?

—Pankaj Sharma

There are recent changes that now allow you to seek a one-time transfer of your Provident Fund (PF) balance to your NPS (tier-1) account. You may reach out to your current employer to request this transfer through the PF office into which your PF contributions were made. You would also be required to request the PF office to notify your current employer of the amounts transferred by the PF office to your NPS account. Since this has only been announced recently, you may face some teething issues in completing this transfer. Do note that such one-time transfer of funds from your PF fund to NPS account is currently exempt from tax in the financial year (FY) of transfer.

If you don’t wish to transfer your PF funds to NPS, you have an option to either withdraw the PF balance (if you remain unemployed for a continuous period of 2 months or if the PF law does not apply to your current employer) or transfer the PF balance from old employer to the PF account with your current employer. As you have contributed to your PF for more than 5 years; therefore, your PF withdrawal/ transfer would not be liable to income tax in the FY of such withdrawal/ transfer. In either scenario, it would be prudent for you to report the ‘amount transferred to NPS or PF with new employer’ or ‘the PF withdrawn in your tax return for the FY in question’, as “exempt income”.

Parizad Sirwalla is partner (tax), KPMG.

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