Are you planning to reconstruct a house? You may wish to demolish an old house and construct a new house in its place. The construction would be ‘reconstruction’ of house property. One of the key areas would be arranging funds for the reconstruction of the house.
You can fund the reconstruction through a home loan from a bank or financial institution. We help you understand the tax benefits associated with the reconstruction of a house property.
The ‘owner’ of the house property is taxable in respect of the property. Similarly, the ‘owner’ is also entitled to claim deductions from the income from the house property.
A residential property used by the owner is a ‘self-occupied property’. The taxable value of a ‘self-occupied property’ is ‘Nil’. In the case of a property let out by the owner, the owner is taxable on the gross rent receipts. You can claim a tax deduction towards the loan used for reconstruction of the house property.
1. Interest payments
You can claim a tax deduction for interest paid on housing loan taken towards the reconstruction of a house. You can claim a deduction for annual interest payments up to Rs 30,000. In a case where the house is let out, you can claim a deduction towards the entire interest payment. However, where the interest payment exceeds the net taxable rent receipts, the loss up to Rs 2 lakh is allowed to be adjusted or carried forward.
The interest deduction can be claimed by filing an income tax return. Similarly, the loss up to Rs 2 lakh can be adjusted while filing the income tax return. Any unadjusted loss up to Rs 2 lakh can be carried forward for up to eight succeeding years. For example, for the financial year 2018-19, all deductions and loss can be claimed in the corresponding income tax return filed for AY 2019-20.
2. Principal repayments
The principal repayments made are not allowed as a tax deduction. The income tax law allows a deduction towards principal repayments only for construction or purchase of a residential house. The deduction is not allowed for loan repayments for the reconstruction of a house property.
You are entitled to claim the deduction for interest payments for the entire duration of the loan. You would need to obtain an interest certificate from the bank or financial institution. Such certificate forms the basis for the claim for a deduction for interest in the income tax return.
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.