Deduction inrespect of interest on loan taken for residential house property.

130(1)

An assessee, being an individual, shall be allowed a deduction of interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property as per the provisions of this section.

130(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 tax year beginning on the 1st April, 2016 and subsequent tax years.

130(3)

The deduction under sub-section (1) shall be subject to the following conditions:—

• (a) the loan has been sanctioned by the financial institution during the period beginning on the 1st April, 2016 and ending on the 31st March, 2017;
• (b) the amount of loan sanctioned for acquisition of the residential house property does not exceed thirty-five lakh rupees;
• (c) the value of residential house property does not exceed fifty lakh rupees; and
• (d) the assessee does not own any residential house property on the date of sanction of loan.

130(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 tax year.

130(5)

In this section,—

• (a) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies, or any bank or banking institution referred to in section 51 of that Act or a housing finance company; and
• (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.

Explanation

Section Summary:

Section 130 provides a tax deduction for individuals on the interest paid on loans taken for the acquisition of a residential house property. The deduction is capped at ₹50,000 per year and applies to loans sanctioned between April 1, 2016, and March 31, 2017. The section also specifies conditions related to the loan amount, property value, and ownership status.

Key Changes:

1. Introduction of Deduction Cap: The deduction for interest on home loans is now limited to ₹50,000 per year, which is a new restriction compared to previous provisions.
2. Specific Timeframe for Loan Sanction: The loan must be sanctioned between April 1, 2016, and March 31, 2017, to qualify for the deduction.
3. Property Value and Loan Amount Limits: The loan amount cannot exceed ₹35 lakh, and the property value must not exceed ₹50 lakh.
4. Ownership Condition: The taxpayer must not own any other residential property at the time the loan is sanctioned.

Practical Implications:

1. For Homebuyers: Individuals purchasing their first residential property within the specified limits can benefit from this deduction, reducing their taxable income by up to ₹50,000.
2. For Financial Institutions: Banks and housing finance companies must ensure that loans meet the criteria outlined in the section to enable their customers to claim the deduction.
3. Tax Planning: Taxpayers must carefully evaluate their eligibility based on the loan sanction date, property value, and ownership status to claim the deduction.

Critical Concepts:

1. Financial Institution: Defined as a banking company under the Banking Regulation Act, 1949, or a housing finance company registered in India.
2. Housing Finance Company: A public company primarily engaged in providing long-term finance for residential property construction or purchase.
3. No Double Deduction: If a deduction is claimed under this section, the same interest cannot be claimed under any other provision of the Income Tax Act.

Compliance Steps:

1. Verify Loan Eligibility: Ensure the loan was sanctioned between April 1, 2016, and March 31, 2017.
2. Check Property and Loan Limits: Confirm that the loan amount does not exceed ₹35 lakh and the property value does not exceed ₹50 lakh.
3. Ownership Status: Ensure no other residential property is owned at the time of loan sanction.
4. Documentation: Maintain loan sanction documents, property purchase agreements, and interest payment certificates for tax filing purposes.
5. Claim Deduction: Include the interest amount (up to ₹50,000) in the tax return under the relevant section.

Examples:

1. Scenario 1: Mr. A takes a home loan of ₹30 lakh in June 2016 to buy a house worth ₹45 lakh. He does not own any other residential property. He pays ₹60,000 in interest during the year. He can claim a deduction of ₹50,000 under Section 130.
2. Scenario 2: Ms. B takes a loan of ₹40 lakh in August 2016 for a house worth ₹55 lakh. Since the loan amount and property value exceed the specified limits, she is not eligible for the deduction under this section.
3. Scenario 3: Mr. C already owns a residential property and takes a loan in December 2016 for a second property. He is ineligible for the deduction under Section 130 due to the ownership condition.