DEDUCTIONS FROM ANNUAL VALUE (SECTION 24)

There are two deductions from annual value

• 30% of NAV
• Interest on borrowed capital.

30% of NAV is allowed as deduction under section 24(a)

• This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
• The assessee will not be entitled to deduction of 30%, in the following cases, as the annual value itself is Nil.
• In case of self-occupied property; or
• In case of property held as stock-in-trade and the whole or any part of the property is not let out during the whole or any part of the previous year upto 2 Years from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority.

 Interest on borrowed capital is allowed as deduction under section 24(b)          

• Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction.
• Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforesaid purposes is also admissible as a deduction.

Interest for pre-construction period

• Pre-construction period is the period prior to the previous year in which property is acquired or construction is completed.
• Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed (Pre-construction interest) as reduced by any part thereof allowed as deduction under any other provision of the Act, can be claimed as deduction over a period of 5 years in equal annual installments commencing from the year of acquisition or completion of construction.
  

Interest for the year in which construction is completed/ property is acquired

• Interest relating to the year of completion of construction/ acquisition of property can be fully claimed in that year irrespective of the date of completion/ acquisition.

ILLUSTRATION 1

Ashok had taken a loan of 2,00,000 for construction of property on 1.10.2020. Interest was payable @10% p.a. The construction was completed on 30.6.2021. No principal repayment has been made up to 31.3.2022. Compute the interest allowable as deduction under section 24 for the A.Y.2022-23.

SOLUTION

Interest for the year (1.4.2021 to 31.3.2022) = 10% of 2,00,000 = 20,000
Pre-construction interest =10% of 2,00,000 for 6 months (from 1.10.2020 to 31.3.2021) = 10,000
Pre-construction interest to be allowed in 5 equal annual installments of 2,000 from the year of completion of construction i.e. in this case, F.Y. 2021-22.

Therefore, total interest deduction under section 24 = 20,000 + 2000 = 22,000.

Deduction in respect of self-occupied property where annual value is nil.

• In this case, the assessee will be allowed a deduction on account of interest (including 1/5th of the accumulated interest of pre-construction period) as under 
  

However, the total interest deduction under (a) and (b) cannot exceed 2,00,000.

ILLUSTRATION 2

Mr. Manoj owns two house properties one at Kolkata, wherein his family resides and the other at Mumbai, which is unoccupied. He lives in Jaipur for his employment purposes in a rented house. For acquisition of house property at Kolkata, he has taken a loan of 50 lakh @10% p.a on 1.4.2020. 

He has not repaid any amount so far. In respect of house property at Mumbai, he has taken a loan of 20 lakh @11% p.a. on 1.10.2020 towards repairs. Compute the deduction which would be available to him under section 24(b) for A.Y.2022-23 in respect of interest payable on such loan.

SOLUTION

Mr. Manoj can claim benefit of Nil Annual Value in respect of his house properties at Kolkata and Mumbai, since no benefit is derived by him from such properties, and he cannot occupy such properties due to reason of his employment at Jaipur, where he lives in a rented house.

Computation of deduction u/s 24(b) for A.Y.2022-23

Certificate to be furnished

• For the purpose of claiming deduction of  2,00,000 as per (b)(i) in the table given above, the assessee should furnish a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property or conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

Important points

• The ceiling limit would not apply to let-out/ deemed let-out property: The ceiling prescribed for self-occupied property as above in respect of interest on loan borrowed does not apply to a let out/deemed let-out.
  
  
• Interest allowable on accrual basis: Deduction under section 24(b) for interest is available on accrual basis. Therefore, interest accrued but not paid during the year can also be claimed as deduction.
  
  
• Unpaid purchase price would be considered as capital borrowed: Where a buyer enters into an arrangement with a seller to pay the sale price in installments along with interest due thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower. In such a case, unpaid purchase price can be treated as capital borrowed for acquiring property.
  
  
• Interest on unpaid interest is not deductible

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