‘Income from House property’ is a separate head for the tax under section 22 to section 27 provided by the Income Tax Act. No matter you have borrowed money for construction of a new house, purchase of property, repair or renovation of a house, the interest you pay on the money borrowed is a deduction in your tax bracket. The maximum deduction allowed for self-occupied property is Rs 30,000 per annum. If you have borrowed capital for any of the above requirements after April 1, 1999, Rs 1.50 Lakhs will be deductible.
You require a certificate from the bank mentioning the amount of interest payable, to avail the higher deduction up to Rs.1.50 Lakhs. There is a condition for claiming the higher deduction, i.e. You have borrowed the funds after April 1, 1999 and the construction or acquisition must be completed within three years from the time your money was borrowed.
There is no strict condition for the date of commencement of construction. You may start the construction before April 1,1999.
This strategy is even better in case of self-occupied house as the interest deductions reduce a good deal of money from the total taxable income. For instance, if we compare a person A with Rs 5 lakhs as total taxable amount and no home loan with a borrower B with the same amount but home loan paying Rs. 1.50 Lakhs as loan interest. Then B can claim interest deductions and thus will be allowed to pay tax on Rs 3.5 lakhs whereas A pays tax on Rs 5 lakhs.