Income Tax and Budget 2017: Here’s all you need to know about tax maths for let-out property

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Published: February 27, 2017 2:54:48 AM

Under the existing provisions, the loss arising (due to interest deduction) from income from house property was allowed to be set off fully against income from any other source.

Finance Bill 2017, Union Budget 2017, Tax Payers of India, property against income, housing loan, infrastructure, Real Estate, investment, housing, Income TaxUnder the existing provisions, the loss arising (due to interest deduction) from income from house property was allowed to be set off fully against income from any other source. (Source: Reuters)

Last weekend, I went to the house warming party hosted by my friend Jijo. But he looked a little worried and when I asked him the reason, he said, “What should I do with the second house? I had done my financial planning around this investment.” I started explaining to him that till now, if an individual has a self-occupied property, interest paid on acquisition/construction of such property was allowed as deduction up to R2 lakh per annum. If the property had been let out/deemed to be let out, the entire rent or notional rent had to be offered to tax and amongst other deductions from house property, the full interest paid was allowed as deduction.

Under the existing provisions, the loss arising (due to interest deduction) from income from house property was allowed to be set off fully against income from any other source (e.g. salary, other sources, etc.) in the same year.

What Finance Bill 2017 says
As per Finance Bill 2017, the set-off of loss from house property against income from any other source is restricted to R2 lakh per annum. Balance loss, if any, will be carried forward for eight subsequent years to be set off against income from house property.

Let’s say, an individual has two house properties, one being self-occupied and the other let out. If he is paying interest on home loan on self-occupied property of R1,50,000 and for let-out property R3,50,000 and he receives a rent of R1,20,000, the amount that can be set off now is R3,80,000. As per the proposed Finance Bill it will be R2,00,000 (See graphic). The balance loss can be carried forward for eight subsequent years.

Under the proposed law, a taxpayer may not be able to fully absorb loss in the same year or in the subsequent year if he does not have sufficient rental income. Hence, this move, once it becomes law, will certainly impact those having significant loss from either let-out property or deemed let-out property, which under the current law can be set off completely (without any limit) against other income.

How it impacts
Though the proposed law may have less impact on individuals who pay lower interest on housing loan, it will definitely discourage individuals who purchase property for investment purposes, as currently, they are able to set off the entire loss arising due to higher interest against other heads of income.

It is not that a taxpayer will have to forego the excess interest (above R2,00,000) completely and forever. He can carry forward the excess loss (which cannot be set off against other heads of income in the current year) for eight subsequent years to be set off only against income from house property for those years.

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The government has also proposed to reduce the holding period for qualifying as long term property from three years to two years with respect to immovable property. So, there is some relief on offer and individuals who bought property from an investment perspective and who do not wish to hold the property, will now be able to sell the property in a shorter duration (two years) and avail the benefits of lower capital tax gain rates associated with the long term capital gain vis-a-vis short term capital gain. After listening to the complete story, Jijo looked a little less apprehensive and went off to meet his other guests.

The writer is tax partner & India mobility leader, EY. Shanmuga Prasad, senior tax professional, EY, also contributed to the article

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