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|
|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|
|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|
|(-) Interest on housing loan restricted to||2,00,000||2,00,000|
|Loss from House property (A)||(2,00,000)||(2,00,000)|
|Net income from House Property after all deductions (B)||60,000||60,000|
|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.
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.