Published 9 May 2026
The narrow scope of 'interest payable on borrowed capital' under sub-clause (b) of section 24 of the Income-tax Act, 1961 -- the disallowance of penalty / late-payment / processing / pre-payment / EMI-conversion charges; the practitioner's reconciliation discipline; and the Income Tax Appellate Tribunal jurisprudence on which charges qualify
Taxpayer Brief
Sub-clause (b) of section 24 of the Income-tax Act, 1961 allows deduction of 'the amount of any interest payable on capital borrowed' for the property. Interest at the agreed rate is clearly covered. Whether the lender's other charges -- processing and administration fees, penal interest for late payment, foreclosure charges -- are covered too is less clear: section 2(28A) defines 'interest' to include 'any service fee or other charge in respect of the moneys borrowed', but the Act does not settle whether that definition governs section 24(b), and claims for such charges are often questioned. Charges not payable for the borrowing at all, such as an insurance premium or stamp duty, are outside both. This article walks through the framework and the reconciliation of the lender's certificate.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Standard EMI with separate interest and principal break-up | Low | Interest portion deductible; principal under section 80C |
Loan with processing / administration fees | Medium | Processing fee arguably 'interest' under section 2(28A); claim open to challenge |
Loan with penalty interest for delayed EMI | High | Penal interest claim open to challenge; interest at the agreed rate still allowed |
EMI converted to interest-only / floating-to-fixed structure | Very High | Conversion charges may or may not be interest -- contestable |
1. The Statutory Phrase -- 'Interest Payable on Borrowed Capital'
Phrase Element | Meaning |
|---|---|
Interest | The price for the use of money; section 2(28A) extends it to any service fee or other charge in respect of the money borrowed |
Payable | Includes both paid and accrued in the relevant year |
On borrowed capital | Payable in respect of the sum borrowed for the property |
For acquisition / construction / repair / renovation | Sub-clause (b) limits the application to property-related borrowing |
2. Charge-by-Charge Analysis
Bank Charge | Section 24(b) Treatment | Reasoning |
|---|---|---|
Interest on principal at the contracted rate | Allowable | Genuine interest on borrowed capital |
Late-payment / penal interest for delayed EMI | Contestable | Interest payable in respect of the loan, but levied for the borrower's default; whether section 2(28A) brings it in is unsettled |
Loan processing fee (typically 0.5-2% of loan amount, charged at sanction) | Contestable | A service fee in respect of the money borrowed falls within the words of section 2(28A); whether that definition governs section 24(b) is unsettled |
Loan administration / annual maintenance fee | Contestable | A service fee in respect of the loan -- same question as the processing fee |
Pre-payment / foreclosure charge | Contestable | A charge in respect of the money borrowed, but payable for early repayment rather than for the use of the money |
EMI-bouncing charge | Doubtful | Charged for the dishonoured payment rather than for the borrowing |
Conversion charge (floating-to-fixed rate change) | Contestable | A charge in respect of the loan -- same question as the processing fee |
Insurance premium on loan-protection policy | Not allowable under section 24(b) | Insurance premium is a separate charge |
Stamp duty on the loan documents | Not allowable | Statutory duty, not interest |
Cheque-return charge / electronic-clearing-service rejection charge | Doubtful | Charged for the dishonoured payment rather than for the borrowing |
The bank statement is misleading by design Banks typically issue a single 'Annual Interest Certificate' that aggregates all loan-related charges -- some interest, some not. Many borrowers and even some practitioners treat the entire figure as deductible. A careful read of the certificate's break-up table or a written confirmation from the lender separating the interest component from the other charges is essential. |
Statutory Reference: what counts as interest Section 24(b) of the Income-tax Act, 1961 allows the amount of any interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct the property. Section 2(28A) defines 'interest' widely, to include 'any service fee or other charge in respect of the moneys borrowed'. Whether that definition carries a processing fee into section 24(b) is not settled by the Act, so a claim for it is open to challenge. The same question arises for penal interest and other charges levied on default. |
3. Worked Example -- Bank Annual Certificate Reconciliation
Mr. Aakash's annual home-loan certificate from State Bank of India for financial year 2025-26 shows -- Total amount paid ₹3,80,000, broken up as: Interest ₹3,50,000; Processing fee ₹15,000 (charged at top-up sanction); Penal interest for two delayed EMIs ₹6,000; EMI-bouncing charge ₹2,000; Document handling charge ₹1,500; Insurance premium ₹5,500.
Charge | Amount | Deductible under Section 24(b)? |
|---|---|---|
Interest on principal | ₹3,50,000 | Yes -- full |
Processing fee | ₹15,000 | Contestable |
Penal interest | ₹6,000 | Contestable |
EMI-bouncing charge | ₹2,000 | Doubtful |
Document handling charge | ₹1,500 | Contestable |
Insurance premium | ₹5,500 | No (may be deductible under section 80C if eligible) |
Clearly deductible under section 24(b) | ₹3,50,000 | |
Not clearly deductible from the ₹3,80,000 line | ₹30,000 |
The 7.9% that is not clearly interest Mr. Aakash's certificate has ₹30,000 (7.9%) that is not interest at the agreed rate. If that amount is claimed and disallowed, the tax at a 30% slab plus 4% cess is ₹9,360, with interest. Claiming only the ₹3,50,000 avoids the dispute; claiming the fees in reliance on section 2(28A) invites it, and the insurance premium is not interest on any reading. |
4. The Processing-Fee Special Case -- Capitalisation Argument
It is sometimes argued that the processing fee, being a one-time cost incurred to obtain the loan, can be added to the cost of acquisition of the property and recovered through the capital-gain computation on a later sale. That is an alternative to a claim under section 24(b) read with section 2(28A), not an addition to it: the proviso to section 48(ii) excludes from cost any interest already deducted under section 24(b), so the same fee cannot be both deducted now and capitalised later.
5. The Pre-Payment Charge -- Statutory Reform
The Reserve Bank of India in 2014 prohibited banks from charging foreclosure / pre-payment penalty on floating-rate home loans of individuals. The penalty continues to apply on fixed-rate loans. Where charged, the pre-payment penalty raises the same section 2(28A) question as the lender's other charges, with the added point that it is paid for early repayment rather than for the use of the money. The position is the same where the loan is refinanced with a different lender.
6. Documentation Discipline
- Annual interest certificate from the lender -- demand a detailed break-up if not provided.
- Loan sanction letter showing the original processing fee.
- EMI schedule with separate interest and principal columns.
- Bank-statement reconciliation showing the actual debits against the certificate.
- Schedule HP entry showing the section 24(b) deductible interest only -- not the total.
- Annual reconciliation working in client file documenting each charge type and treatment.
7. Key Takeaways
- Sub-clause (b) of section 24 covers 'interest payable on capital borrowed'; section 2(28A) defines interest to include service fees and other charges in respect of the money borrowed.
- Interest at the agreed rate is deductible; processing, administration, conversion and pre-payment charges and penal interest are contestable; insurance premium and stamp duty are not interest.
- Bank annual certificates aggregate all charges; practitioner discipline requires per-charge reconciliation.
- Processing fee may have a capitalisation argument for capital-gain purposes -- but cannot be double-claimed.
- Annual reconciliation of the lender's certificate separates the clear interest from the contestable charges.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.