TAX BENEFITS OF COMMERCIAL PROPERTY LOAN (India)
Taxation of Commercial Property Income
Rental Income from both residential & commercial property is taxable under the head “Income from House Property” in the hands of the owner.
The amount of rent received or expected to be received from such property is known as “annual value” and is taxable under this head after certain deductions.
Applicable Tax Deductions
A reader may note that any deductions, conditions or clauses detailed below are updated up to the Finance Bill 2020 (Union Budget for FY 2020-21). The quantum of deductions and the conditions for availing these deductions as mentioned here are exactly the same for FY 2018-19, FY 2019-20 as well as the choice of existing tax regime in FY 20-21. These benefits are however restricted in the new tax regime as explained later in this tutorial.
The Income Tax Act allows deduction under two heads for income from commercial property (annual value): a standard deduction and the deduction allowed for interest on loans under Section 24.
I. Standard Deduction for repairs, insurance, electricity, water supply etc. is allowed at the rate of 30% of annual value. This deduction is available for a let out (rented out) commercial or residential property whether you have actually incurred any expenditures on repairs or not.
II. Deduction of Interest (Section 24): this is the deduction available on the interest paid on loan taken for purchase/construction/repair/reconstruction of residential or commercial property. Further, the processing fees and prepayment fee paid for commercial property loans is treated as interest and is also eligible for deduction under Section 24.
No limit is defined for the deduction of interest in case of commercial property loan. The taxpayer can claim tax deduction for the whole interest amount. However, starting FY 17-18, the maximum loss for Income from House Property if any after deduction of interest is capped at Rs 2 lakhs annually as explained below.
The taxable income from house property is added to the assessee's gross annual income and taxed as per the applicable income tax slabs. In case, the taxable income from house property is negative, the loss (up to Rs 2 lakhs) is allowed to be set-off against income from other heads in the given financial year. If the loss cannot be set off against other income heads in the given financial year or where the loss is greater than Rs 2 lakhs, the remaining loss can be carried forward to future years and set off against income from house property or other income heads as applicable for the next 8 years.
NOTE: the new tax regime limits the tax benefit of interest deduction in case of let out (rented out) house property, both residential and commercial. While the new regime does not allow any deduction of interest under Section 24 for a self-occupied house property, in case of let-out house property (including commercial property), one can claim standard deduction as well as interest deduction but only up to the net annual value (gross rent - municipal taxes). Put simply, the new tax regime allows deductions u/s section 24 for let out commercial property but does not allow the loss if any to be set-off against income from other heads in the given financial year. Also there is no provision to carry forward the losses to future years.
Conditions
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Available on payable basis. This means deduction is allowed on the year in which it accrues irrespective of year on which it has been paid.
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The deduction in respect of interest is available for money borrowed from anyone including friends and relatives.
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There is no limit on the deduction allowed for the interest amount on loan taken for commercial property whether the property is let out or used for the purpose of own business/profession.
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No tax deduction is allowed during the construction period:
(i) If loan is taken for Repair/Renewal/Reconstruction no deduction is allowed for interest paid before completion.
(ii) If loan is for Purchase/Construction, the aggregate interest paid during construction shall be allowed as deduction in five successive financial years starting from the year in which construction is completed.
NOTE: no deduction is available under Section 80C for repayment of principal for commercial property loan in either the existing tax regime or the new tax regime or any previous financial years.