Home loan: There is no such restriction as regards to payment of interest on borrowed capital
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Question: I am planning to buy a house for which my father is ready to give loan. I will repay him on EMI basis (Principal + Interest). Can I claim deductions for this home loan? What documents I need to submit to Income Tax Department to claim deduction of Interest and Principal?
Answer: For claiming income tax deductions in respect of principal portion comprised in an EMI, the home loan should have been taken from specified entities like central or state government, any bank including cooperative bank, LIC, National housing bank, any housing company, any cooperative society engaged in providing loans for financing construction of house, your employer who is a public company or public sector company or any university etc. Since you are planning to take the loan from your father you will not get any income tax rebate in respect of any capital repayment of housing loan available under Section 80 C.
However, there is no such restriction as regards to payment of interest on borrowed capital therefore you will be able to claim the deduction of interest payable up to ₹2 lakh in case the property is self-occupied. In case the property is let out, you can claim full interest subject to restriction of maximum amount of set off of loss under the house property income against other income during the year up to ₹2 lakh. Loss not so set off during the year is allowed to be carried forward for set off against house property income in next 8 years. Please note that the interest, which you pay to your father is his income and your father will have to include such interest in his return of income for the relevant year/s.
You will need a certificate from your father stating the amount of interest payable for each year, as the same maybe demanded by the income tax officer during the course of assessment proceedings. Further you will have to conclusively prove that the money borrowed was was in fact used for buying the property.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail and @jainbalwant on Twitter.com.