Tax Deduction Benefits on Pre-Closure Charges paid to the Lender

I recently transferred my loan from one bank to another to take advantage of the lower rates offered by the new lender. Will this, in any way, affect the tax benefits available on the loan repayments? I have paid pre closure charges to the bank. Are any tax benefits available on such pre- closure charges?

In the case of self occupied property, Section 24 clearly provides that where the “new loan” is taken to payoff an existing loan-that was taken to acquire/construct the property, then the deduction of interest will continue to be available on such loans. If the property is not self occupied, an old circular of the I-T department should come in handy for you to claim the benefit.

As no such specific provision exists in Section 80C-regarding the availability of deduction with reference to the principal repayment to the new lender, the deduction is technically not available for the repayment of principal to the new lender although- in practice it is allowed.

Pre-closure charges can be said to be “other charge (payable) in respect of the moneys borrowed” and hence will be treated as interest as defined in Section 2(28A) and can be claimed as a deduction accordingly.

However, if you use your funds to pay off the existing lender, and then take a loan from the new lender, tax benefits will not be available. You will not be able to claim the tax benefits on the repayment of the new loan because the new loan cannot be said to have been taken to payoff an existing loan.

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