In Union Budget 2017 the government has reduced interest set off on home loans for rented property. This is likely to significantly raise tax outgo for those who loaned to buy rented property.
Impact for interest benefit set off on Rented Property
Before Budget 2017 – Before Budget 2017, the loss from house property (in case of rented property) which is basically the interest paid on home loan was allowed to be adjusted from remaining incomes without any limit. It would reduce tax liability to a great extent. Several taxpayers considered investment in house property as a means of tax planning while creating an asset with a long term view.
After Budget 2017 – But now the budget 2017 will limit this set off of loss from rented house property to Rs 2 lakhs per annum. This change in budget would reduce the tax savings in comparison to pre-budget.
Deduction for home loan interest is now same for both rented and self-occupied property i.e. Rs 2Lakhs.
Note: The income tax act says that those who own more than one property, must treat one of them as rented property. Basically only one property can be treated as self occupied and others have to be assumed to be rented. Tax has to be paid on notional rent. A lot of people who own two properties, assumed the loaned property as rented and managed to claim the entire interest as deduction. Such taxpayers can no longer do so.
Home Loan Interest deduction is now limited to Rs 2L in all of the following cases –
(1) property is rented
(2) property is self-occupied
(3) second self-occupied property
(4) or property is assumed to be rented
Let’ say Rahul has house has a rental income of Rs 40,000 per month and he is paying home loan interest of Rs 10 lakhs per annum. He has income from remaining heads of Rs 12 Lakhs p.a.
In financial year 2017-18, Rahul will face additional tax liability of Rs 82,300, let’s understand how.
Income from house property
|FY 2016-17||FY 2017-18|
|Less : Municipal Taxes Paid||10,000||10,000|
|less: Standard Deduction(30% * 4,80,000)||1,44,000||1,44,000|
|Less: Interest on House loan||10,00,000||10,00,000|
|Loss from house property eligible to be set off||(6,74,000)
(maximum limit allowed )
Total Income and tax calculation
|FY 2016-17||FY 2017-18||Additional Tax in FY 2017-18|
|Income from remaining heads||12,00,000||
Loss from house Property
|Total Taxable Income*||5,26,000||10,00,000||82,300 (excluding 3% cess)]|
*tax calculations assume no 80C deduction is being claimed.
This change will bring parity between the tax benefit allowed on self-occupied property with the property that is rented.
In both cases loss which can be adjusted is limited to Rs 2lakhs.
Carry forward of loss
Unadjusted loss can be carried forward to 8 years. However in this manner, loss which has not been set off will keep on accumulating (every year’s unadjusted loss is carried forward) and is practically speaking a dead loss.
While this may come across as a harsh and an anti-taxpayer move, it’s time for investors to consider assets other than investing in property (via loans). Buying a second house via loan will be unattractive as a tax saving mechanism.
Filing statistics from FY 2013-14 show that Rs1,525 crores was claimed as house property loss in 2.65lakh returns. Information is not available whether this pertains to self-occupied or rented properties. The bifurcation may bear an important marker to assess real impact.
You can read our detailed guide on house property here.