Interest on housing loan paid outside India can be claimed as a deduction in calculating income from house property, only if some important conditions are met
Among the various tax-saving investments and expenses that are available to taxpayers in India, the deduction for interest payable on housing loan is one of the most popular and widely availed one.
It is common knowledge that interest on housing loan payable in India can be claimed as a deduction in calculating income from house property, which is self-occupied or let out during the year, subject to the prescribed conditions and limits. Loss arising on account of such deduction can also be set-off against other income and if not fully set-off, can be carried forward for set-off in the following eight assessment years. The question which arises here is, does interest on housing loan payable outside India in respect of a house situated outside India, also qualify for such deduction? This question often arises in the case of foreign citizens who have stayed in India long enough to be ordinary residents in India.
The Income tax Act (Act) provides that interest on a loan payable outside India which is chargeable under the Act shall not be deducted in computing the income chargeable under the head "Income from house property", if the tax on such interest has not been paid or deducted.
Interest chargeable under the Act
Under the Act, any interest payable by a person who is a resident in India will be deemed to accrue/arise in India and will accordingly be taxable in India. For instance, if A, a resident of India has a house property outside India and pays interest on a housing loan he has taken in respect of such property from a bank outside India, he will not be allowed a deduction for such interest unless he deducts tax from the interest before paying it to the bank outside India and deposits such tax with the Indian tax authorities. This holds true even if the interest is paid by the Indian resident to the foreign bank directly from a foreign bank account. This leads to a peculiar situation where the interest receivable by a foreign bank in respect of a loan it has granted to a customer, probably when he was a local resident in that country, becomes subject to tax in India just because the customer has now become a tax resident of India.
The Double Taxation Avoidance Agreement may also not provide any relief in such a case since most of India’s DTAAs consider that interest paid by a resident of India will be considered to arise in India and will be subject to tax in India (though at a beneficial rate of tax). Hence, an individual resident in India who pays interest on a loan outside India is cast with the responsibility of deducting tax therefrom and complying with all other filing formalities so that he can claim a deduction for the interest paid.
The Act provides for an exception to this rule in cases where the interest is payable in respect of any moneys borrowed and used for the purposes of a business carried on outside India or for the purpose of making or earning any income from any source outside India. In such cases, the interest will not be deemed to accrue/arise in India and hence will not be chargeable to tax in India. Continuing the same example of A above, there could be the following possibilities:
- A’s house was always let out and continues to be let out in the year when he is resident in India and pays interest outside India.
- A had originally bought the house for his own occupation while he lived outside India (and not for letting it out) but then let it out after he moved to India. Hence it is let out and fetches rental income in the year when he is resident in India and pays interest outside India.
- A’s house was let out for a few years in the past but is vacant and does not fetch any rental income in the year under consideration when he is resident in India and pays interest outside India.
There is no clarity as to which of these cases would qualify as ‘money borrowed for the purpose of earning an income from a source outside India’. While case 1 would be a strong case falling under the exception, case 3 may be the weakest. If his case falls within the exception, A would be absolved from deducting any tax from the interest he pays to the foreign lender and he can still claim a deduction for the interest.
To sum up, interest on housing loan paid outside India can be claimed as a deduction in calculating income from house property, only if the following conditions are fulfilled:
- Taxes are deducted on interest paid outside India; or
- Income is earned on property held outside India, in which case, the interest can be claimed as a deduction even though no taxes have been deducted because such interest falls under the specific exception laid down by the Act.
Note: This article does not address the implications under the exchange control regulations in India, if any.(The writer is a Partner with Deloitte India. Mousami Nagarsenkar-Director and Richa Udaipuri-Assistant Manager, Deloitte Haskins & Sells LLP also contributed to the article)The Great Diwali Discount!
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