In ascertaining the total income of a person for a year of income interest paid on amount borrowed from specified financial institution shall be deductible. The amount must have been borrowed to finance either:-
i. The purchase of premises; or
ii. Improvement of premises – which he occupies for residential purposes.
• The amount of interest allowable under the law must not exceed Kshs.300,000 per year (equivalent to Kshs.25,000 per month) with effect from 1st January, 2017.
• If any person occupies any premises for residential purposes for part of a year of income the allowable deduction shall be limited to the period of occupation.
• On the other hand no person may claim a deduction in respect of more than one residence. Following amendment to Section 45 of the Income Tax Act through the 1999 Finance Act, a married woman can now file her own separate return of income and declare income from employment, professional or self-employment income.
• In view of this, she has the option to claim for deduction of interest paid provided that the property is registered in her name.
• Employer must obtain a signed declaration to the effect that she is the one claiming the deduction to avoid her husband making a similar claim.
• The first four financial institutions specified under the fourth schedule of the Income Tax Act include:-
i. A bank or a financial institution licensed under the Banking Act.
ii. An insurance company licensed under the Insurance Act.
iii. A building society registered under the Building Societies Act.
iv. The National Housing Corporation established under the Housing Act
Employers will be required to ascertain and allow interest paid on money borrowed to finance owner occupied residential premises under the PAYE system subject to the following conditions:-
— The employer should allow actual interest paid by eligible employee on production of certificate from the lending institution confirming interest payable on the loan for that particular year. The amount of interest to be allowed as ascertained under his condition must not exceed Kshs. 25,000 per month. For the month of December, all the monthly interest allowed should be added together and only the difference between this amount and the annual allowable deduction of Kshs.300,000 should be allowed in the month of December.
— Where the employee redeems such loan in the course of the year and no interest is subsequently payable such allowable deduction shall cease forthwith upon redemption of the loan.
— The employee shall sign a declaration indemnifying employer against any false claim in this respect
— Employers are expected to review their pay-rolls starting from the month of September and make necessary adjustment to ensure that by the end of year correct amount of interest has been allowed
— The employer shall attach to Form P9A Photostat copy of interest certificate and statement of account from the specified lending institution.
NOTE:
• Interest which has accrued but has not been paid does not rank as an allowable deduction for this purpose.