Impact of restricting loss in House Property Income on second house’s loan after Budget 2017?

The Finance Bill 2017 brought some relief to small taxpayers by reducing tax slab rates, reducing time limit for long term capital assets but it also reduced some tax planning scope for middle income group people. Prior to this budget, there was no limit for claiming of loss under house property for the second house but now the rules have been changed from AY 2018-19.

How to claim income tax benefit on second house's loan after Budget 2017?
How to claim income tax benefit on second house’s loan after Budget 2017?

Provisions before Budget 2017 regarding claiming benefit on Loss from House Property

  • On self-owned house/ 1st house (if not let out), the interest benefit under section 24 is limited to only Rs 200,000/- (In case assessee has more than one house, they can only choose one as a self-occupied house and others are to be treated as let out property only)
  • On second house (whether rented or not), there was no limit for claiming deduction of interest. In case, the house is not rented a notional rent is taken to calculate the income under house property head

Because of that, many people enjoyed no limit on income tax exemption on second house and invested in high value property along with lots of tax savings.

Loss from House Property Provisions as Proposed in the budget 2017

  1. Limit of exemption for self-owned house remains the same
  2. A new Section 71-3A is introduced to limit the benefit of interest claimed for second house up to Rs. 200,000/- only
  3. The loss can be carried forward to 8 years

Analysis/ Prospective Outcome of changes in provisions of Loss under House Property Income

  1. It will increase the tax burden of all the people who have bought high value property on loans and using the interest payment to save their taxable income. Loss under head House property can be used to set off income under other heads which is now limited to Rs 200,000/- only per year
  2. The carry forward of loss up to 8 assessment years is of new use because every year’s unutilised loss will get accumulated (as per set off/ carry forward rules carry forward losses were set off from the income after set off of current year loss) and basically all unutilised loss will become a dead loss
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Let us take an example of how this provision will increase the tax burden

Let us say Ram has other income apart from house property as Rs 12 lakhs p.a. He owns a property from which he earns a rental income of Rs. 50,000/- per month and pays an interest of Rs. 10,00,000/- p.a. on the home loan.

FY 16-17

(Amount in Rs)

FY 17-18

(Amount in Rs)

Rental Income (50,000*12) 600,000 600,000
Less: Municipal Taxes 20,000 20,000
NAV 580,000 580,000
Less: Deduction u/s 24 (30%) Standard 174,000 174,000
Less: Interest 10,00,000 10,00,000
Loss u/h House property 594,000 594,000
Eligible loss to claim 594,000 200,000
Calculation of total Income
Income from remaining heads 12,00,000 12,00,000
Less: Loss 594,000 200,000
Total taxable Income 606,000 10,00,000
Total Tax (including Cess and as per new rates applicable) 47,586 1,15,875
Increase in tax Burden 68,289

 

Note: The above example has been taken without considering the deduction under section 80 C.

Although if the house is co-owned then interest can be claimed up to Rs 400,000/- by taking Rs. 200,000/- deduction by each individual; like earlier it was done in case of self-owned house for claiming interest.

What can be done to claim full loss on Second House Property after above amendment

Above amendment is likely to hit hard to some assessees who used to invest their savings in acquiring house properties for sake of earning rental income and for seeking capital appreciation

To continue claiming benefit of full interest, assessee may adopt following approach

  1. Start building capital in name of spouse/ major children. Consult your CA for avenues to build capital in their name, as approach may vary from client to client depending on various factors
  2. New Property may be acquired in Spouse/ Major Children

Related read- How House Property income is Taxed