The Hindu Business Line : Principal-interest dichotomy

Allowing interest is not an act of condescension, because it is not possible to compute real income without deducting all the related expenses, including interest.

Many people have been wondering why the income-tax code for housing loan speaks with a forked tongue.

Interest is deductible while computing income from house property no matter who the lender is — there seems to be no objection even to kandu vaddi (usurious interest) — whereas the repayment of principal to the same lender passes muster only if he belongs to one of the specified categories banks, housing finance companies, employer-public company, etc.

Mindless dichotomy

To be more specific, if a friendly loan is taken from an affluent relative, the interest paid or payable to him makes the grade under Section 24 as a deduction while computing income from house property, but the repayment of principal to the same lender does not quality for deduction from gross total income (GTI) under Section 80C. Is there a rationale behind this seemingly mindless dichotomy?

Allowing interest is not an act of condescension, if one may say so, because it is not possible to compute real income without deducting all the related expenses, including interest.

That the rate of interest is usurious can hardly be the ground for its disallowance. But allowing deduction from the GTI of the principal is certainly an act of benevolent condescension because it can be nobody's case that such deduction is crucial to correct determination of taxable income.

Parliament has of course rightly chosen to spur savings/investment habit provided the avenue chosen is a safe haven and otherwise desirable.

But no one can possibly go to the court of law should Parliament have a change of heart and wrench away Section 80C deduction.

Should it however, similarly, wrench away a legitimate business expense like interest, one definitely can cry on judiciary's shoulder and get redress.

If this dichotomy between a legitimate expense and an incentive is appreciated, then one can easily understand why kandu vaddi is all right but not the concomitant repayment of principal to the same source. Ditto for a friendly loan from an affluent relative.

Cold comfort

But this fine distinction may give only cold comfort to a person who for some reason prefers the cosy arrangement of a loan from his avuncular relative because at the end of the day the repayment of principal is not going to make the grade under Section 80C. Not for him is the subtle difference between a legitimate expense and an incentive.

However Parliament cannot be faulted for putting its weight behind the organised segment of the money-lending business for two reasons:

First, it would be idle for anyone to expect the legislature to give parity of treatment to the organised and unorganised sectors of the economy, especially because no one can seriously dispute the fact that the unorganised sector often has its moorings in the nether world of black money.

And, second, it is eminently in the borrowers' interest to steer clear of the unorganised sector despite the seeming advantage of flexibility that dealings with that sector brings to them.

(The author is a Delhi-based chartered accountant.)