1️⃣ General Provision for Deduction of Interest

As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, special rules apply.

2️⃣ When is the Deduction Allowed?

✔️ If the capital is borrowed for acquiring a capital asset, the interest expense can be deducted, but the timing of deduction depends on the asset’s usage status:

📌 Before the asset is put to use:

• Interest incurred up to the date when the asset is first put to use is not allowed as an immediate deduction.

• Instead, it is capitalized and added to the cost of the asset.

• This capitalized interest becomes part of the depreciable cost of the asset and is claimed as depreciation over time.

📌 After the asset is put to use:

• Interest paid on the borrowed capital after the asset is put to use is allowed as a deduction in the year in which it is incurred.

3️⃣ Special Cases & Exceptions

💡 For House Property (Section 24(b))

• Interest on capital borrowed for purchasing, constructing, repairing, or reconstructing a house property is deductible under Section 24(b) as follows:
  ✅ For self-occupied property: Up to ₹2,00,000 per annum.
  ✅ For let-out property: Full interest is deductible.

💡 For Capital Gains Computation

• If capital is borrowed for acquiring a capital asset (not for business use), the interest paid before the transfer of the asset is added to the cost of acquisition under Section 48 while computing capital gains.

4️⃣ Illustration

🔹 Example 1 (Business Asset): A company borrows ₹50 lakh for purchasing machinery. The machine is installed after one year. The interest for the first year is capitalized, while later interest is deducted from business income.

🔹 Example 2 (House Property): Mr. X takes a home loan of ₹30 lakh at 8% interest. He can claim ₹2 lakh per annum under Section 24(b) if the house is self-occupied.

5️⃣ Conclusion

✅ Interest deduction depends on whether the capital asset is put to use.
✅ Before use – Interest is capitalized; After use – Interest is deductible.
✅ Special provisions apply to house property and capital gains computation.

Understanding these provisions ensures maximum tax benefits while acquiring capital assets using borrowed funds! 🚀