Deduction for Housing Interest available on Paid or Payable basis?

Query: I am desirous of investing in a house and need a Housing Loan of Rs.20,00,000.  An institutional loan would mean adhering to a strict schedule of interest and installment payments and hence I am considering the option of availing such loan at 7.5% interest per annum from my Senior Citizen father, who would have no objection in granting me accommodation in payments so as to suit my liquidity convenience.  Being in the top tax bracket, I would like to know if I can avail tax deductions for housing interest and installment payments, if they are not actually paid during the year but deferred for payment in the later years as per my convenience.

Reply: Section 24(b), which provides for deduction of interest on housing loan refers to the term ‘interest payable’ and not ‘interest paid’. Since this deduction is available on ‘accrual basis’, you can claim the benefit of interest deduction of Rs.1,50,000 (at 7.5% of the Rs.20,00,000) and save tax of Rs.46,350 (at 30.9%), though the interest is not actually paid by you during the year.  You will be required to furnish a certificate from your father from whom you have borrowed the capital specifying the amount of interest payable by you for the year.  Your father may also be well advised to show this interest income on accrual basis and being a Senior Citizen, he may be able to plan zero tax liability.

However, as regards the deduction for payment of installments of housing loan under Section 80C, the same is available only in respect of actual repayment and that too if the amount is borrowed from the Government, Bank, LIC, Housing Finance Institution or an employer being a Company, Co-operative Society, Local Authority, University or College.  Repayment of housing loan installments from a private source, as in your case, is not eligible for deduction under Section 80C. You would, therefore, be required to plan other investment options for availing the benefit of this deduction.

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