Overall Claim For Interest On Home Loan Limited To Rs. 2 Lakh

I am staying in a rented house in Mumbai. I have a flat in Jaipur, which is let out, and for which I am paying equated monthly instalments (EMIs) on my home loan. Now, I have booked another apartment in Mumbai for which the possession is due in March 2025. I have taken a home loan and borrowed from my wife for the Mumbai flat. We are planning to stay in the Mumbai flat. Can I claim tax benefits for the Mumbai house also? 

Answer: For the let out flat in Jaipur, you are entitled to claim deduction at the rate of 30 per cent of the rent received by you, in addition to the regular interest paid by you. 

For the second house, which is still under construction, you will be able to claim tax benefits from the year of completion and possession. You will be able to claim aggregate of the interest paid during the construction period in five equal instalments beginning from the year in which the construction is completed, and possession is obtained. Since you will be staying in the house, the amount of overall claim for interest paid to your wife and the bank shall be restricted to Rs. 2 lakh, including the one-fifth portion of the interest paid during the construction period. Do note that you cannot set off losses under the ‘head income from house property’ beyond Rs 2 lakh in a year, whether you own one house or multiple houses. The unabsorbed loss is allowed to be carried forward for eight years for set-off against house property income only.

For principal repayment of home loan to the bank, you can claim tax befits under Section 80C of the Income-tax Act, 1961 for up to Rs. 1.5 lakh every year for all the houses taken together. 

For the Mumbai flat, you will be able to claim it beginning from the year of completion of the house along with other eligible items, such as Public Provident Fund (PPF), equity-linked savings scheme (ELSS), National Savings Certificate (NSC), life insurance premiums, and so on. 

Do note that you will not be able to claim any tax benefits in respect of repayment of home loan, if any, made to the bank for the years during which the construction of the house was not completed. No tax benefit is available in respect of repayment of loan taken from your wife. 

I have received a compensation of Rs. 1 crore for my ancestral agricultural land, which I used for agriculture, and which has now been acquired by the Rajasthan government. The documents were executed on April 30, 2022. I am planning to buy another agricultural land within two years. Can I claim tax exemption against the agricultural land to be bought by me? 

Answer: First, you have to ascertain whether the land was an agricultural land within the meaning of Income-tax Act, 1961. You need to get it examined by a chartered accountant based on location and population of the area where the land is located. If it falls within the definition of ‘agricultural land’, you do not have any income tax liability for compensation received. 

If the land is not an agricultural land within the definition of income tax, you can still claim exemption for long-term capital gains, if the land was used for agricultural purpose during the last two years, either by you or your parents, provided you invest the capital gains for purchase of another land to be used for agriculture within a period of two years from the date of transfer. 

As the land is an ancestral property, you are unlikely to know its cost of acquisition.

So, you can take the fair market value of this land as on April 1, 2001, as your cost price. You can compute your long-term capital gains by applying the cost inflation index to the fair market value as on April 1, 2001.  

Do note, that in case you are not able to purchase such new land for agricultural use before the due date of filing of your return i.e., July 31, 2023, you have to deposit the amount of indexed capital gains in the capital gains account with a bank which you can use for buying the land for agricultural purpose later.  

The author is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)