Deduction on interest paid

You can claim a deduction for the interest paid on a housing loan, loans taken for repair, renewal or reconstruction of an existing property. Such deduction is available on an accrual basis. In fact interest paid on a fresh loan taken to repay another existing loan is also allowed for tax sops. However if a third loan is taken to refinance the second loan, tax rebate on interest payments will not be permitted.

Deduction on the principal repayment

Deduction for the principal is allowed together with the amount paid for stamp duty, registration fee and other expenses related to the transfer of the purchased property. However the repayment of the borrowed capital is deductible only if it is from Central Government, State Government, any bank that includes co-operative bank, LIC or NHB, a public sector company or co-operative providing housing finance, or where the employer is an authority or a Board or a Corporation or a public company or a public sector company or university or co-operative society.

House Ready for Use

A tax payer should know that if the house is under construction or is not yet ready for use, one is not eligible for deduction either on principal or interest. Only if the construction is completed within three years from the end of the financial year in which the capital is borrowed, interest deduction will be allowed. Moreover to avail the tax benefit, the owner cannot sell the property for five years from the end of the financial year in which the possession was taken.