With the Modi government’s stress on affordable housing and its resolve to provide ‘Housing for All’ by 2022, both realtors and homebuyers were looking towards the Budget 2017 with much hope. They were expecting the FM to give additional income tax incentives to first-time home buyers and also provide higher tax savings on housing loans, like enhancing the housing loan interest deduction limit on self-occupied property to Rs 3 lakh at least.
But surprisingly, the FM has proposed to restrict the loss on house property, which was allowed to be deducted (adjusted) from income under ‘other heads of income’ including ‘salary income’, up to Rs 2 lakh only. Experts say that the budget proposal of restricting the tax deduction on interest paid on rental property to Rs 2 lakh will definitely be a loss of opportunity for people buying home for rental income.
“Under the current tax regime, taxpayers were allowed to offset any amount of loss (on account of interest on housing loan) on a rented property against other heads of income. The restriction of Rs 2 lakh was applicable only in case of a self-occupied property. But the budget has extended this restriction even to ‘rented’ and ‘deemed-to- be-rented’ homes as well,” says Vaibhav Sankla, Managing Director, H&R Block India.
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Under the existing law, rental income (which is zero in case of a self-occupied one) from house property is eligible for the following deductions:
If the house is rented or ‘deemed to be rented’,
1. Municipal tax paid on the house (No deduction in case of self- occupied property),
2. 30% standard deduction (on the rental income) and
3. Deduction for entire interest paid on the loan taken for that house are allowed as deductions (restricted to Rs 2 lakh in case of a self-occupied piece of property).
“The figure arrived at after allowing above deduction from the rental income is either profit or loss from that house. Total of all the losses or profits from all the houses owned by the taxpayer is called “Income or Loss form House Property”. Under the current regime, this loss is allowed to be set off against income under other heads of income such as salary without any limit. This results in substantial tax saving for the taxpayer,” says Sankla.
But the Budget 2017 aims to limit the amount of set-off the ‘loss from house property’ to the maximum Rs 2 lakh per annum. This means that the taxpayer will now be able to set off a maximum amount of Rs 2 lakh against his other income. The unadjusted loss from house property, however, can be carried forward for 8 assessment years to be set off against income from house property. Experts, however, say that this is not enough as the interest payments will mount every year.
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Whatever be the case, this move is said to be aimed at bringing parity between the tax benefit allowed on ‘self-occupied’ property with property that is ‘rented’ or ‘deemed rented’ in terms of the loss on house property.
Let us understand this with the help one example:
Mr Shastri is owning a single house which can fetch a monthly rental of Rs 20,000. He is paying municipal taxes of Rs 12,000 per annum and is paying an interest of Rs 4,67,500 per annum on the loan taken for this house. Let’s see the impact of this budget on his taxes if the house is self-occupied or if it is given on rent.
(So in case of single self-occupied property, Budget 2017 has no tax impact as such, but in case the same property is given on rent, then the tax benefit post budget will be reduced by Rs. 33,341)
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Let us consider another example:
Mr. Shastri is owning two houses.
House-1: Is self-occupied and he is paying municipal taxes of Rs 8,000 per annum and paying an interest of Rs 2,55,500 per annum on the loan taken for this house.
House-2: Is given on a monthly rental 20,000, he is paying municipal taxes of Rs 12,000 per annum and paying an interest of Rs 4,67,500 per annum on the loan taken for this house.
Let’s see how this budget is going to impact his taxes.
(In above case where the taxpayer holds more than one house, the tax benefit post budget 2017 will be reduced significantly by Rs 95,141 (Rs 1,56,941 less Rs 61,800).
At the surface this seems to be a very strange move when one looks at various incentives provided to the affordable housing sector and the various other benefits on capital asset transactions, viz. reduction in the holding period of long-term immovable property from the existing 3 years to 2 years and changing the base year from 1980-81 to 2000-01 for cost inflation index (used for capital gains calculations).
A deep insight into this surprise move, however, reveals the government’s intention to bring down the property prices. “All these amendments are aimed at taking out investors (who invest in property only to earn good profit) from the property market and bringing down the property prices so that they are within the reach of normal taxpayers who wish to buy 8property for living in it. But this can be seen as a double-edged sword. On the one hand, it can help in bringing down the property prices significantly and making it affordable to the common man, while on the other hand it can demotivate those investors who can invest in property and rent it to the ones who are not so privileged,” says Sankla.