A recent decision by Income Tax Appellate Tribunal, Mumbai has brought cheer to the face of taxpayers who have taken huge home loans and have somehow managed to repay the same before the term of home loan. The banks used to charge pre-payment/foreclosure fees or penalty from the taxpayer in case they settle their home loan earlier than the time stipulated. Reserve Bank of India in June last year had prohibited banks from charging foreclosure charges or prepayment penalties of any kind on home loans taken on floating interest basis.
The current decision is in favor of the taxpayers, that they can claim deduction for the fees paid as penalty or fees for pre-payment of home loan.
Taxpayers can claim prepayment charges as deductible under the head income from house property and could set it off against other heads of income, such as salary income. This will help in saving tax a little more tax.
The case came to light when Windermere Properties filed appeal in the tribunal to examine the definition of interest. Interest on home loan is admissible as a deduction under income from house property. It is obvious that these prepayment charges have a live and direct link with the home loan.
The income tax department disallowed the claim which was then taken to the tribunal by the aggrieved party. Tribunal bench added, “It is beyond our comprehension as to how the amount paid as interest for the home loan taken is allowable as a deduction but the amount paid as prepayment charges of the very same loan is not deductible.”
Both the direct interest and prepayment charges were held by the tribunal to fall within the definition of the term interest and allowable as a deduction from house property income.
This ruling will help those individuals and entities who have during Financial Year 2013-13 have paid foreclosure charges for pre-payment of home loan. This charge/fees will be eligible for deduction under income from house property.
Salaried employees can set off the charges against their salary income and file the return on or before 31st July, 2013.
The Tribunal decision will help in the pending assessment case of earlier years as well as for taxpayers for the financial year 2012-13. It is likely that taxpayer would have paid the charges during April and May, 2012.
