Budget 2017: tax benefits on home loan interest for rented property now Rs 2lakhs

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 

 

For example

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
Rental Income

(40,000*12)

4,80,000 4,80,000
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)

(no limit)

(2,00,000)

(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  

12,00,000

 

 

Loss from house Property

 

(6,74,000) (2,00,000)
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.

 

Our Opinion

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.

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13 Responses to Budget 2017: tax benefits on home loan interest for rented property now Rs 2lakhs

  1. G S Krishnan February 3, 2017 at 10:00 pm #

    It is a illogical move. When commercial properties are built with substantial loan sums and when let out for rentals, there will be loss in the initial years which will be set off against other income as like business loss. How can they curb this loss alone to Rs.2.00 lakhs. Is the letting out the property is a sin or speculative or illegal activity.

  2. Lak February 5, 2017 at 7:04 pm #

    It is a big loss for people who had taken housing loans considering the Tax benefits. Will hang ourselves because of huge financial burden.
    Has to be rolled back to save lives.

  3. Vasanth February 9, 2017 at 7:35 am #

    It’s meant to prevent additional demand on housing by people who already own a house so that the costs for first time owners are within reach. Good move towards housing for all by 2022. Tax savers form a miniscule % of the population.

  4. AB February 9, 2017 at 4:53 pm #

    What about if one have only one property and its rented out. Since I read everywhere as 2nd home. Will the loss beyond 2 lakhs be allowed to be adjusted if the only one owned house is rented.

  5. Anup February 12, 2017 at 10:34 am #

    The provision to limit the loss on house property is a complete twisting of basic financial fundamental to suit the purpose to squeezing more out of the salaried class. The fact that a second house can be considered to be a business investment and rent hence received is treated as an income then the current allowance of interest and expenses is a sound principle.
    Without any logic taxing my complete income and forcing me to limit my expenses is a autocratic behaviour at best. This has pushed the hardworking middle class to have no means to secure the future.
    Mr Jaitley hope better sense will prevail on you and there would be a correction to this provision.

  6. anand February 13, 2017 at 3:00 pm #

    Is it

    2 lakhs for self occupied + let out property

    or

    2 Lakhs for self occupied and 2 lakhs for let out property

    • cleartax-team February 16, 2017 at 5:29 pm #

      Maximum loss that can be claimed under house property head in your income tax return in a financial year is restricted to Rs 2lakhs. This limit is applicable on loss due to interest on all properties in total, maximum allowed Rs 2lakhs.

  7. sivasubramanian February 13, 2017 at 8:31 pm #

    This move of limiting to 2 lacs is a big punishment for the people who have invested in home and honest tax payer. if there is any sudden change it should consider the people who have already invetsed. this can be applicable for the new house investment.

  8. sivasubramanian February 13, 2017 at 8:37 pm #

    This move of limiting to 2 lacs is a big punishment for the people who have invested in home and honest tax payer. if there is any sudden change it should consider the people who have already invetsed. this can be applicable for the new house investment. finance ministry is to consider it carefully as this is going to affect the basic life of the honest tax payer.

  9. Lakshmikumar February 14, 2017 at 5:00 pm #

    This move of limiting to 2 lacs is a big punishment for the people who have invested in home and honest tax payer. This change should be applicable only for NEW Property purchased from 01st April 2017 since this impact the existing home loan borrowers or people who have already invetsed. Finance ministry is to consider it carefully as this is going to affect the basic life of the honest tax payer from the Salaried class who are mainly dependent on the salary income. Mr Jaitely Ji please consider and have this provision changed to be applicable for New property purchased from 01st Apr 2017.

  10. Gaurav Dave February 15, 2017 at 9:24 pm #

    Somehow my comments are not getting posted. I asked the below query in my previous attempt:
    Is the limit of 2 lacs PER rented property or is it CUMULATIVE for all rented properties?

    • cleartax-team February 16, 2017 at 5:25 pm #

      Maximum loss allowed to be claimed under the head house property in your income tax return is restricted to Rs 2lakhs. Which means, in aggregate for all rented/self occupied properties, you total loss claim is limited to Rs 2L in a financial year.