G P Khungar

I work for a private sector company at Pune. I intend to purchase an apartment, which costs about Rs 10 lakh. I intend to finance the purchase as under:

* I want borrow Rs 3 lakh from my employer, which carries an interest at the rate of six per cent per annum. I will have to pay back the loan to my employer in five years. The equated monthly installments (EMIs) are calculated at Rs 5,750 each. The interest component will be calculated on decreasing balance basis and the interest cost component for the first loan year shall be approximately Rs 16,500.
* I also propose to take a loan of Rs 5 lakh from my father-in-law and this would be subject to an interest rate of 18 per cent per annum and the interest is payable monthly. I will start repaying the principal amount only after the employer’s loan has been fully settled.
From the sixth year, in addition to the interest, I shall also start refunding principal loan amount—Rs 65,000 (sixth year), and Rs 84,000 (seventh year), Rs 1.02 lakh (eighth year), and Rs 1.20 lakh (ninth year) and Rs 1.29 lakh (tenth year).
* I intend to meet the shortfall amount of Rs 2 lakh from my personal savings or liquidation of certain securities that I currently hold.
Please advise, how can I derive full income tax rebate benefit under Sections 88 and Section 24 of the Income Tax Act? I shall be grateful if you could indicate annualised tax deductions that I would be entitled to avail under the proposed housing finance pattern.
—S S Marathe, Pune

The above scheme of financing is workable provided your employer will issue you a separate certificate on an annual basis detailing your loan account and, in particular, the interest that has been paid by you during the year to service your employer’s loan. You will also need to enter into a proper loan agreement with your father-in-law on a non-judicial stamp paper and the loan amount, the rate of interest and the loan repayment terms should be clearly described in this document. A copy of this agreement is to be filed by you with your income tax assessing authority at the time of filing your first income tax return after availing the loan.

If you do all these and your income tax assessing authority accepts the arrangement then I do not foresee any difficulty in your being able to avail admissible rebates under Section 24(ii) and Section 88 of the Income Tax Act. As you are aware Section 88 permits you to claim tax deduction at 20 per cent of the principal loan amount that you have repaid during the previous year.

This is, however, subject to a ceiling of Rs 20,000 per assessment year. I do not envisage any difficulty in your being able to claim tax deduction of Rs 4,000 per annum for the next 10 years following the year of purchase of your house on this account.

As far as Section 24(ii) is concerned this relates to deduction in your taxable income to the extent of interest that you pay on a housing loan for purchase of a self-occupied house. However, the deduction is subject to a ceiling of Rs 1.50 lakh per annum.

Based on the data provided by you, it should be possible to avail Section 24 (ii) tax benefits as per table below:
Source of funds:
Employer Father-in-law Tax rebate
1st year
Loan 3,00,000 5,00,000
Interest 18,000 90,000 1,08,000
2nd year
Loan 2,40,000 5,00,000
Interest 14,400 90,000 1,04,000
3rd year
Loan 1,80,000 5,00,000
Interest 10,800 90,000 1,00,800
4th year
Loan 1,20,000 5,00,000
Interest 7,200 90,000 97,200
5th year
Loan 60,000 5,00,000
Interest 3,600 90,000 93,600
6th year
Loan nil 5,00,000
Interest nil 90,000 90,000
7th year
Loan nil 4,35,000
Interest nil 78,300 78,300
8th year
Loan nil 3,51,000
Interest nil 63,180 63,180
9th year
Loan nil 2,49,000
Interest nil 44,820 44,820
10th year
Loan nil 1,29,000
Interest nil 23,220 23,220