5. What is meant by Interest on borrowed capital?
Interest on borrowed capital is the interest paid or payable on a loan used for income-generating activities. It typically refers to business expenses (like funding operations or expansion) or real estate investments (like purchasing or building a property). [1, 2, 3,
4]
1. In Real Estate (House Property)
When you take a loan to purchase, construct, repair, or renew a house, the interest paid on that loan is the interest on borrowed capital.
- Tax Benefit: Under Section 24(b) of the Income Tax Act in India, this interest can be claimed as a deduction to lower your taxable income.
- Limits: For a self-occupied property, the deduction is generally capped at ₹2 lakh per financial year. For let-out (rented) properties, there is usually no maximum cap.
- Pre-Construction Interest: Interest paid during the construction phase cannot be claimed immediately but can be claimed in 5 equal installments starting from the year construction is completed. [10]
2. In Business and Profession
If a business borrows money (e.g., via term loans or bonds) to fund its operations, the resulting interest expense is also termed interest on borrowed capital.
- Tax Benefit: Under Section 36(1)(iii), this interest is allowed as a deductible business expense.
- Condition: The deduction is only permitted if the borrowed funds are strictly utilized for the purpose of the business or profession. [2, 12]
The Bottom Line
Whether for property or business, treating this expense as "interest on borrowed capital" allows individuals and entities to reduce their tax liabilities, provided they meet the statutory requirements of the respective tax laws. [1, 2, 3]
Comments
Post a Comment