Interest on loan taken for residential house property (Section 80EE of Income Tax Act)
Section – 38, Finance Acts – 2016 amended the Section 80EE of Income tax Act relating to Deduction in respect of interest on loan taken for residential house property
For section 80EE of the Income-tax Act, the following section shall be substituted with effect from the 1st day of April, 2017, namely:—
80EE. Deduction in respect of interest on loan taken for residential house property.—(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential property.
(2) The deduction under sub-section (1) shall not exceed fifty thousand rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2017 and subsequent assessment years.
(3) The deduction under sub-section (1) shall be subject to the following conditions, namely:—
|(i)||the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017;|
|(ii)||the amount of loan sanctioned for acquisition of the residential house property does not exceed thirty-five lakh rupees;|
|(iii)||the value of residential house property does not exceed fifty lakh rupees;|
|(iv)||the assessee does not own any residential house property on the date of sanction of loan.|
(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.
(5) For the purposes of this section,—
|(a)||“financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies, or any bank or banking institution referred to in section 51 of that Act or a housing finance company;|
|(b)||“housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.’.|
Applicability of Section 80EE : Deduction in respect of interest on loan taken for residential house property
Section 80EE has been substituted with effect from assessment year 2017-18
Conditions for Deduction in respect of interest on loan taken for residential house property
All the following conditions must be satisfied by the Assessee
- The assessee is an individual; ( this deduction not available to HUF or any other person )
- Assessee may be resident or non-resident
- the assessee has taken a loan
- Loan is taken for the purpose of acquiring a residential property; ( this deduction not available in case loan is taken for repair or renovation of house )
- value of residential house property does not exceed Rs.50 lakhs;
- loan has been taken from a financial institution; ( this deduction is not available in case loan is taken from any other source other than financial institution )
- loan has been sanctioned by the financial institution during the period from 1-4-2016 to 31-3-2017
- Amount of loan sanctioned for acquisition of the residential house does not exceed Rs. 35 lakhs;
- the assessee does not own any residential house property on the date of sanction of loan.
Amount of Deduction in respect of interest on loan taken for residential house property
a) If the aforesaid conditions are satisfied, the assessee shall be entitled to a deduction of the lower of (i) interest payable on loan or (ii) Rs. 50,000
b) When the aforesaid deduction is allowed for any interest, deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.
Meaning of residential house property for claiming Deduction in respect of interest on loan taken for residential house property
The term ‘residential house property’ has not been defined in the Income tax Act. In Amit Gupta v. Dy. CIT  6 SOT 403 (Delhi) for the purpose of Section 54 it has been observed as follows
“The expression residential house has not been defined in the Act. The popular meaning of the word is a place or building used for habitation of people. It is used in contradistinction to a place which is used for the purpose of business, office, shop, etc. It is not necessary that a person should reside in the house to call it a residential house. If it is capable of being used for the purpose of residence; then the requirement of section is satisfied. “
The term ‘residential house’ came for discussion before the Orissa High Court in a wealth-tax case in CWT v. K.B. Pradhan  130 ITR 393 wherein it was held that the word ‘house’ used for residential purposes would not include a house property in the process of construction, which is incomplete and not habitable. Only if the house has reached a stage of construction by which it is available for occupation and is otherwise habitable, the assessee can regard the property as being in the nature of a residential house, but not otherwise.
In Poonen v. Rathi Varghese AIR 1967 Ker. 1, it was held that a residential house should constitute an abode or residence, though not necessarily for the use of the person who owns it.
The distinction between building and dwelling house has been discussed in the SC’s decision in the case of Tata Engineering & Locomotive Co. Ltd. v. Gram Panchayat AIR 1976 SC 4263.
A temporary structure cannot constitute a residential house ITO v. Rohini Reddy  122 ITD 1 (Hyd.).
A residential house cannot merely be a property with only a boundry wall and garage-cum-room [Rajesh Surana v. CIT  306 ITR 368 (Raj.).
At one time this phrase was used to mean an independent and complete unit. This interpretation in the course of time because of a cute shortage of land expansion in houses became vertical rather than horizontal and such interpretation of independent units as residential houses is out of tune. The expression takes into account all independent residential units, particularly in these days when multi-storeyed flats are becoming the order of the day [see Addl. CIT v. Vidya Prakash Talwar 132 ITR 661 (Delhi)& CIT v. Kodandas Chanchlomal  155 ITR 273 (Guj.)].
Residential house property may be new or old for claiming Deduction in respect of interest on loan taken for residential house property
Dduction under section 80EE would be available in respect of an existing house or new house purchased by the Assessee
Deduction in respect of interest on loan taken for residential house property is available if the house property is let out or vacant ?
The deduction would be available whether the residential property is vacant, self occupied or let out.
A residential house will not cease to be a residential house because it remained vacant for a part of the year (CWT v. Smt. Muthu Zulaibha  245 ITR 800 (Mad)
Why need of Section 80EE ? Deduction in respect of interest on loan taken for residential house property :
As per Union Budget 2016-2017 Speech of Shri Arun Jaitley, Minister of Finance, dated 29-2-2016
” Measures for promoting affordable housing
143. For the ‘first – home buyers’, I propose to give deduction for additional interest of Rs. 50,000 per annum for loans up to Rs. 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs. 50 lakh.”
As per Clause 37 of Finance Bill 2016 :-
Clause 37 of the Bill seeks to substitute section 80EE of the Income-tax Act relating to deduction in respect of interest on loan taken for residential house property.
The provisions contained in the existing section provides for deduction upto one lakh rupees in respect of interest payable on loan taken by an assessee being an individual from any financial institution for the purpose of acquisition of a residential property. This benefit was available during the assessment years begining on the 1st day of April, 2014 and ending on the 31st day of March, 2016.
It is proposed to substitute the said section so as to provide a deduction for those who buy residential house property for the first time, in respect of interest on loan taken from any financial institution upto fifty thousand rupees subject to other conditions specified therein. It is proposed to extend the benefit of deduction till repayment of loan continues.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation assessment year 2017-2018 and subsequent years.
As per Memorandum of Finance Bill 2016 :-
” Incentives for Promoting Housing for All
With a view to incentivise affordable housing sector as a part of larger objective of ‘Housing for All’, it is proposed to amend the Income-tax Act so as to provide for hundred per cent deduction of the profits of an assessee developing and building affordable housing projects if the housing project is approved by the competent authority before the 31stMarch, 2019 subject to certain conditions which inter alia, include:-
(i) The project is completed within a period of three years from the date of approval,
(ii) The project is on a plot of land measuring not less than 1000 sq. metres where the project is within 25 km from the municipal limits of four metros namely Delhi, Mumbai, Chennai & Kolkata and in any other area, it is measuring not less than 2000 sq. metres where the size of the residential unit in the said areas is not more than thirty sq. metres and sixty sq. metres, respectively,
(iii) where residential unit is allotted to an individual, no such unit shall be allotted to him or any member of his family, etc
The existing provisions of section 80EE provide a deduction of up to 1 lakh rupees in respect of interest paid on loan by an individual for acquisition of a residential house property. This benefit is available for the two assessment years beginning on the 1st day of April 2014 and on the 1st day of April 2015.
In furtherance of the goal of the Government of providing ‘housing for all’, it is proposed to incentivise first-home buyers availing home loans, by providing additional deduction in respect of interest on loan taken for residential house property from any financial institution up to Rs. 50,000. This incentive is proposed to be extended to a house property of a value less than fifty lakhs rupees in respect of which a loan of an amount not exceeding thirty five lakh rupees has been sanctioned during the period from the 1st day of April, 2016 to the 31stday of March, 2017. It is also proposed to extend the benefit of deduction till the repayment of loan continues.
The deduction under the proposed section is over and above the limit of Rs 2,00,000 provided for a self-occupied property under section 24 of the Act.
These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent assessment years.
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