Budget 2020 Expectations: The Union Budget 2020 is round the corner and like every year, there are expectations galore as Finance Minister Nirmala Sitharaman is set to present her second budget in the first week of February. Among the many expectations of taxpayers, particularly homebuyers, one key expectation is the restoration of income tax benefit on second home, which may not only benefit homebuyers in a big way but also the real estate sector by stimulating the sagging sales.
It may be noted that until FY 2016-2017, the loss arising from a house property (mainly on account of interest on housing loan) in case of let-out property (LOP)/ deemed let-out property (DLOP) was allowed to be set off against other heads of income. This encouraged individuals to buy a second home funded with a home loan.
“In the initial years when the interest cost of the loan remains high, the individual could have saved tax not only on the rental income but also on other income, by setting off the entire loss from house property against other income. Such set off was restricted to Rs 2 lakh only, by the Budget 2018, w.e.f. FY 2017-2018, as a result of which, the tax saving that a second house property brought is no longer available. However, if this benefit is restored in the Budget 2020, this would be beneficial to individuals who let out their 2nd property as they would be able to set off house property loss (on account of high interest payments) on second property,” says Homi Mistry, Partner, Deloitte India.
One should, however, note that if the second property is not let out, then the individual cannot claim the benefit, because as per amendments to the tax laws carried out in the last Budget, an individual is not taxed on two self-occupied property and the interest deduction for both such self-occupied house property put together is restricted to Rs 2 lakh.
Explaining further, tax experts say that where the net result of computation under the head ‘Income from House Property’ is a loss and the assessee has income assessable under any other head of income, he can set-off such losses from the income taxable under such other head of income. The maximum loss of Rs 2 lakh under the head house property can be set-off during the year against income taxable under any other head.
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“Such restrictions have been introduced by the Finance Act, 2017. The memorandum explaining the Finance Bill, 2017 did not state any reason for introducing such restriction. This restriction, however, applies to all assessees and covers all types of property whether residential or commercial. Further, Rs 2 lakh is the maximum amount which shall be allowed to be set off irrespective of the number of house properties held by assessee. The real estate sector, which is already facing slowdown, has been impacted by this amendment as investors won’t choose to invest in properties as they cannot set off the loss (if any) arising from property beyond Rs 2 lakh,” says Naveen Wadhwa, DGM, Taxmann.
Why restoration of tax benefits on second home is crucial for real estate, homebuyers
In view of the above, tax and industry experts are of the view that the FM should reconsider this amendment and either increase the set-off limit or remove this provision.
“Providing tax benefits for second home purchase can definitely help boost housing sales. It would bring back some of the flagging investor sentiment and help developers to unfetter their pent-up inventory. Owning a second home is currently seen as an unattainable luxury for most middle-class Indians, but the sentiment for it is as high as ever. It would also be a major step towards meeting the government’s Housing for All by 2022, as many Indians hope to own second homes to accommodate their extended families,” says Anuj Puri, chairman, ANAROCK Property Consultants.
Ideally, tax breaks on second home purchase should also be coupled with the formal deployment of the Model Tenancy Act, as this would help revive investor sentiment.
“We already know that end-user demand alone is not sufficient to fully revive the housing market – to achieve a market-significant sales turnaround, investor activity is indispensable. Moreover, if the upcoming Budget 2020 also brings the much-anticipated reduction is personal income tax, we can definitely expect more interest from both first home and second home buyers,” suggests Puri.