The Hindu Business Line : Tax exemption on purchase of plot

AN individual already owns a residential house. He has taken a loan to purchase a vacant plot on which he proposes to construct a residential house by taking another loan. Both these loans are from financial institutions/banks. Will interest on the money borrowed for purchase of the vacant plot be eligible for deduction? Will the repayment of the principal sum borrowed for purchase of the vacant plot be eligible for rebate?

Ch. Rao

Reply

It has already been clarified through this column that interest on loan taken for the purchase of a plot on which, a house is to be constructed should also qualify for the deduction under Section 24 and further that the principal repayment of such loan should also qualify for the rebate under Section 88. This view has been expressed for the reason that it would only be fair that this view be taken given that the objective of purchase of the plot is to be build a house and further that a house cannot normally be purchased or constructed without purchase of a plot of land. In this context reference had also been made to Circular No.667 dated October 18, 1993 of the Board rendered in the context of Sections 54 and 54F, which are exemptions available in computing capital gains. Under this circular the Board has clarified that the cost of the plot on which a residential house is situated should also be taken into account in computing the amount to that is eligible for exemption under Sections 54/54F.

These Sections provide for an exemption on reinvestment in a residential house. Given this in the background it may be clarified that no deduction or rebate can be claimed until such time as the construction of the house is complete.

The interest up to the end of the previous year immediately preceding the previous year of completion of construction will however qualify as pre construction period interest which can be claimed as a deduction in five equal annual instalments commencing from the year in which the construction of the house is completed but within the overall ceiling limits.

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