Under the Income Tax Act of 2015, an individual who has a mortgage can deduct interest paid during the year in calculating his taxes.
When do you get the mortgage interest benefit? Do you get the benefit at the time you file your annual tax returns, or do you get it as you pay income tax through the year? Employees, for example, pay taxes each month on the salary earned.
When you can deduct mortgage interest was the subject of a High Court ruling in December 2019.
The Income Tax Act of 2015 makes concessions for mortgage interest paid by an individual through borrowing to construct or acquire a place of residence.
Paragraph 4 (3) of the Sixth Schedule of the Act, describes mortgage interest as a temporary tax concession for residential premises and states in part:
“… in calculating the income of the individual from employment, business, or investment for the year, deduct mortgage interest incurred during the year.”
Ghana Revenue Authority’s (GRA) Position
Before this ruling, the Ghana Revenue Authority (GRA) allowed an individual to deduct mortgage interest only when they filed their annual income tax returns.
A taxpayer who disagreed with GRA’s interpretation took GRA to court for an interpretation of the provision in the tax law.
The High Court Ruling
In court the GRA insisted that mortgage interest paid during the year should only be claimed when the taxpayer files his income tax returns for the year.
The court, however, ruled that the mortgage interest benefit is a tax concession, not a relief. So, mortgage interest can be deducted upfront.
What does this mean in practice?
Let us assume an employee’s total assessable income for April 2020 is GHS 5,000 and qualifying mortgage interest paid in that month by the employee is GHS 200.
The employer, in computing the employee’s employment income for the month of February, can deduct the interest paid before applying the tax rates. As a result, the employee will pay lower taxes in the year 2020, and not in 2021 when he would file his annual tax return for the year 2020.
Highlights of the Tax Concession
- Mortgage interest on loans used to buy or construct commercial property does not qualify for deduction from an individual’s assessable income for a year.
- The individual may deduct interest on only one residential premises during his lifetime.
- An employer has a legal basis for deducting interest paid by their employees in calculating pay as you earn (PAYE).
- Employers should keep all relevant documents relating to ownership and loan transactions for future tax audits.