If you are the one claiming tax benefit on interest payment on home loans, this is something for your attention.
Section 71 of the Income Tax Act allows set off of loss under head “income from house property” against income under any other head. Till now, there is no restriction on the amount of loss that can be set off. Further Section 71B allows loss not so set off to be carried forward for set off against house property income for eight assessment years. For additional real estate and mortgage guidance look at here.
Here comes the surprise!
Union Budget 2017-18 has proposed to amend the above mentioned Section 71 to restrict set off of loss from house property against income under any other head during the current year up to Rs 2 lakhs. The loss not absorbed would be allowed to be carried forward for set off as per existing provisions.
Wondering, how does it relate to interest on home loan?
Be it a self-occupied property or unoccupied or let out property, you can claim deduction for interest payment on home loan under Section 24(b).
In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction. However, in case of a self-occupied property, the limit is Rs. 2,00,000 or Rs. 30,000, as the case may be. I found it at Inheritance Advanced website that loan can also be taken on an inherited asset through a probate process.
Here is an example to let you understand how your computation of income looks like:
|Head||Self-occupied property||Let out/ Deemed to be let out|
|Rental Income/Annual Value (A)||Nil||1,20,000|
|Standard deduction @30% (B)||Nil||36000|
|Interest payment on Home loan (C)||1,50,000||1,50,000|
|Allowable interest||2,00,000||No upper limit|
|Income (loss) from house property |
From above table, you can conclude, that in most cases, interest payments on home loans results in a loss under head “income from house property”. This loss can be adjusted against any other head of income for the year under consideration by virtue of Section 71 and therefore in terms of common man parlance, a “deduction” against current year income.
Now, see how the proposed amendment affects you. Check the below example.
From the above table, we draw the following inferences:
- So far as the self-occupied property is concerned, it has no impact due to existing cap of Rs 2 lac in section 24 by which, the loss available for set off, is automatically restricted to Rs 2 lac.
- The worst affected are let out or deemed let out cases. The amendment brings increase in taxable income for the year under consideration and hence, the tax liability.
- Though the unabsorbed part (Rs 60,000) will be allowed to be carried forward to next year for set off, yet you must have sufficient future rental income to take the benefit.
The government proposal to restrict housing interest tax break to Rs 2 lakhs per annum is aimed to curb the misuse by those who have surplus funds and earn tax benefit by purchasing second property. Well, the major takeaways from the proposal are:
- The proposed amendment, definitely, results in more tax outgo and for some people, it might imply change in tax brackets as well.
- Earlier the borrowers used to claim unlimited tax benefits on interest payments towards home loans for a rented out second property. By capping the immediate relief at Rs 2 lacs, the proposed amendment brings self-occupied as well as let out property at parity, in terms of available deduction against other incomes.
- The amendment is of concern to those who have high interest rate home loans and are in the initial years of repayment, when the interest component comprises a major portion of EMIs.
Keep visiting www.taxingtax.com for further updates on Budget 2017-18.