Budget 2017: Set off benefits of loss from house property restricted to Rs 2 lakhs.

In Union Budget 2017 the government has restricted the set off of loss from house property against other heads of income to Rs 2 lakhs. This amendment will majorly affect taxpayers who have availed a loan for a property which they have rented out, resulting in a significant tax outgo.  Let us see how.

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 arises majorly on account of the interest on loan availed, 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 has limited this set off of loss to Rs 2 lakhs per annum. This change in budget would reduce the tax savings in comparison to pre-budget.

This amendment would not have an impact on taxpayers who have losses from house property that is self-occupied because they can anyway claim a maximum deduction in respect of interest only to the extent of Rs 2 lakhs.

Note: The Income-tax Act says that those who own more than one property, must treat only one of them as self occupied property 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, by doing so now, are not going to benefit as much as they benefited before the amendment.

Let us understand the implications of the amendment by way of an example

  • X has a salary income of Rs 10 lakhs for AY 2017-18 & 2018-19 and Interest income from FD of Rs 4 lakhs
  • He owns 3 house properties :

Property A – Self occupied for which he pays a housing loan interest of Rs 2.8 lakhs

Property B – Let out for residential purposes yielding a net income of Rs 60,000, after all deductions

Property C – Let out for commercial purposes, the annual value being Rs 5 lakhs and interest on loan repayment being Rs 6.5 lakhs

  • He has invested in PPF to the extent of Rs 1.5 lakhs and also in NPS upto Rs 50,000

Let us find out his tax liability for the AYs 2017-18 and 2018-19.

Computation of total income and tax liability

Particulars AY 2017-18 AY 2018-19
Salary income 10,00,000 10,00,000
Income from house property(*) (4,40,000) (2,00,000)
Income from other sources (Interest income) 4,00,000 4,00,000
Gross total income 9,60,000 12,00,000
Deductions 2,00,000 2,00,000
Taxable income 7,60,000 10,00,000
Tax on the above 77,000 1,12,500
Additional tax outgo excluding cess in AY 2018-19 on account of the amendment   35,500

 

(*)Workings for Income from House Property 

Particulars AY 2017-18 AY 2018-19
Property A    
Annual Value Nil Nil
(-) Interest on housing loan restricted to 2,00,000 2,00,000
Loss from House property (A) (2,00,000) (2,00,000)
Property B
Net income from House Property after all deductions (B) 60,000 60,000
Property C
Annual Value 5,00,000 5,00,000
Less : Standard deduction 1,50,000 1,50,000
Less : Interest on loan 6,50,000 6,50,000
Loss from house property (C) (3,00,000) (3,00,000)
Total income from house property (A+B+C) (4,40,000) Restricted to (2,00,000)

Balance loss of 2.4 lakhs can be carried forward for the next 8 AYs

*tax calculations assume no 80C deduction is being claimed.

 

Carry forward of loss

Further, unadjusted loss from house property i.e. the amount of loss from house property that could not be set off against other incomes during a particular year, 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 not be as attractive as earlier 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: Set off benefits of loss from house property restricted to Rs 2 lakhs.

  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.