While finance minister Arun Jaitley duly recognised the contribution of the salaried class to tax revenues in his Budget speech, he did not do much to meet their expectations. Instead, he has closed the only door of tax planning available to them.
The salaried class pays taxes on gross salary without any allowance in the form of standard deduction for expenses connected with salary income. However, employees incur expenses on professional upgradation like seminars and trainings, but unlike business expenses, there is no allowance on salary expenses. The only tax planning opportunities explored by salaried class is house rent allowance (HRA) and loss under the head ‘income from house property’. The Budget proposals have tightened the noose on both these avenues of tax planning.
Income from house property
Taxpayers earning huge income either from salary or business could reduce their tax liability by setting off the loss from house property on account of interest paid on loan taken for acquisition of the house property. Under the extant provisions of the law, the interest on housing loan paid in respect of a rented property (including deemed to be let out property) is allowed to be set off completely and in case where the rental income is less than the interest on housing loan, it could be set off with income from any other source —salary, business income, etc., resulting in reduction in tax liability. However, where the house property is self-occupied, the loss from house property that can be set off is capped at Rs 2 lakh.
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To rationalise these provisions and to bring parity between deduction on account of interest on housing loan from rented versus self-occupied property, maximum amount of loss from house property that can be set off against income from any other source will now be restricted to Rs 2 lakh. Any loss in excess of Rs 2 lakh would have to be carried forward to be set off against income from house property only for eight years.
Given the ticket size in the metro cities where most houses are priced over R1 crore, if an individual takes home loan of, say, R80 lakh , the annual interest cost shall be around Rs 8 lakh, restriction on set-off of loss from house property at R2 lakh shall cause undue hardship to those planning to buy a second house as an asset in a metro city. This may hit hard the demand in the already gloomy real estate sector.
Tax on house rent
Bringing landlords under the tax net and targeting those abusing the beneficial provisions of HRA, the Budget has killed two birds with one stone by imposing liability to withhold taxes on payment of rent by individuals to resident landlords. An individual taxpayer shall now be required to deduct taxes at a rate of 5% on rentals paid to a resident landlord, if the monthly rent exceeds R50,000.
This shall ensure that those landlords who could get away by filing a declaration that they do not have PAN and hence remain out of the tax net, would be mandatorily required to obtain PAN. This shall also ensure that the landlords come forward to file their return of income to claim credit of taxes withheld at source by the tenant.
The provisions have ensured that landlords who do not have PAN shall also be hit by the TDS, since tax can be deducted at the time of credit of rent for the last month of the tax year or last month of tenancy, as applicable. Also, the salaried class supposedly paying rent to their parents, aunts and uncles would have to rethink their compensation structure. The income-tax rules are expected to provide certain relaxations with respect to other withholding tax compliances, viz., PAN of the deductor may be used instead of TAN.
The writer is executive director, Nangia & Co.
