1. Here’s how you will be losing on tax benefits on your second home now

Here’s how you will be losing on tax benefits on your second home now

The Budget 2017 has restricted the tax deduction on interest paid on rental property to a maximum of Rs 2 lakh per annum, which will now be a loss of opportunity for people buying a home for rental income.

By: | Updated: July 28, 2017 11:38 AM
The cap of Rs 2 lakh could well prove to be a loss-making proposition for people in the higher tax bracket.

If you are planning to buy your second home for rental income or saving tax, then take into consideration its tax implications also. As most of you are already aware that the Budget 2017 has restricted the tax deduction on interest paid on rental property to a maximum of Rs 2 lakh per annum, which will now be a loss of opportunity for people buying a home for rental income.

Previously, “after the permissible deduction of municipal taxes, 30% of the rental income and interest paid on a housing loan, the annual rental income in most cases used to become zero or even negative. This was called ‘loss from house property’. The set off of the loss was allowed from other income heads like salary, and that too with no limit. But now with the deduction limit on housing loan interest being capped at Rs 2 lakh, the assessees will have to pay some taxes on the rental income,” says Rishi Mehra, CEO of Wishfin.com.

Let us understand this better with an example. Suppose, an individual, namely Harish Sharma, has taken a housing loan to buy a piece of property to let out. The annual interest repayments come out to be Rs 12 lakh. The yearly rental income of the property stands at Rs 5 lakh. Let us now see how the pre- and post-budget scenarios will affect his taxation.

Pre-Budget (All amount are in Rs)

(A) Annual Rental Proceeds = 5,00,000

(B) Municipal Taxes = 15,000

(C) Net Annual Value (NAV) of Property – (A-B) = 4,85,000

(D) Standard Deduction at 30% of NAV, i.e. (30% of 4,85,000) = 1,45,500

(E) Resultant Value – 4,85,000-145,500 = 3,39,500

(F) Interest Paid on a Housing Loan Annually = 12,00,000

(G) Loss from House Property = 12,00,000-3,39,500 = 8,60,500

(H) Loss from House Property Permissible for Set Off = 8,60,500

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Post-Budget (All amount are in Rs)

(A) Annual Rental Proceeds = 5,00,000

(B) Municipal Taxes = 15,000

(C) Net Annual Value (NAV) of Property – (A-B) = 4,85,000

(D) Standard Deduction at 30% of NAV, i.e. (30% of 4,85,000) = 1,45,500

(E) Resultant Value – 4,85,000-1,45,500 = 3,39,500

(F) Interest Paid on a Housing Loan Annually = 12,00,000

(G) Loss from House Property = 8,60,500

(H) Loss from House Property to be Set Off = 2,00,000

The remaining loss of 6,60,500 (8,60,500 -2,00,000) can now be carried forward to the next 8 assessment years. These losses will be set off against the income from house property head only.

Thus, “the cap of Rs 2 lakh could well prove to be a loss-making proposition for people in the higher tax bracket provided the interest paid on a loan taken to buy a home for rental purposes is on the higher side,” says Mehra, adding that with tax deduction cap now at Rs 2 lakh, people buying homes for the purpose of tax could seek home loans wherein the interest payable is less.

  1. A
    Akhil Verma
    Jun 7, 2017 at 6:25 pm
    Sir what about the interest ac ulated during the pre possession timeline. Earlier if I understand correctly it could be adjusted from income tax in 5 subsequent years.. How will it change withe new rule
    Reply
  2. V
    venkat
    Jun 7, 2017 at 1:37 pm
    Why don't you write about this next year? This news was celebrating 4th month anniversary day before yesterday!
    Reply

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