Withdrawal of PF before 5 years would make amount taxable

I live in Delhi in my own house. In 2007, I took a housing loan to fund the purchase of an under-construction flat in another city (Faridabad which comes under National Capital Region of Delhi but otherwise falls in Haryana). It is expected to be completed in FY13. I haven’t claimed any tax benefit so far. What happens to the loan instalments I have paid so far? Can they also be claimed for tax benefit?

—Dhirendra Tripathi

According to the Income-tax Act, 1961, where the property has been acquired or constructed with borrowed capital, the interest payable on such capital for the period prior to the year in which the property has been acquired shall be allowed as deduction in five equal instalments beginning from the year in which the property is acquired. Thus, the interest included in the loan instalment paid by you during the construction period shall be eligible for deduction from the year in which the flat is acquired/construction is completed.

The principal amount of the loan repaid till date shall not be available as a deduction under section 80C till the time the construction of the flat gets completed. Once the flat is completed and the possession is handed over to you, you will be eligible to claim deduction for interest paid on the loan under section 24(b) and principal amount of loan under section 80C. The total amount of deduction available under section 80C shall be limited to Rs 1 lakh. Thus, as of now, you are not eligible for any tax benefit on such loan repayments.

I worked with a private company for four and a half years. I have given a provident fund (PF) withdrawal request to my ex-employer. Will the PF amount be taxable?

—Hemant Shah

We understand that the PF maintained by your former employer was a recognized PF. As per the provisions in the Income-tax Act, if the employee has rendered continuous service with his employer for five years or more, then the withdrawal of accumulated balance from such PF is not taxable at the time of termination.

Since the period of your services with the ex-employer is four and a half years which is less than five years, you shall be liable to tax on the amount withdrawn from your PF. In addition to the normal tax payable by you, you will be required to pay all the tax concessions availed by you so far on account of contribution to such recognized PF. Further, the total employer’s contribution plus interest thereon, which was not taxed earlier, shall be taxable as profits in lieu of salary.

However, if the accumulated balance in your PF account is transferred to your recognized PF account maintained by the new employer, no tax liability shall arise due to such transfer.

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Nitin Baijal is director, BMR Advisors