Excluding second house property from Notional Taxation & its side effects.

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Excluding second house property from Notional Taxation & its side effects.

 

 

Housing loan Interest is eligible for deduction under the Income Tax Act -1961. In respect of self occupied house property, maximum deduction permissible is Rs. 2 Lakh (Rs. 30,000/- if the loan is taken for repairs, renovation or reconstruction). In case of let out property, entire interest paid is allowable as deduction without any restriction as such.

Let us see its impact in two different scenarios in the case of Mr. Ram who has purchased the house property for Rs. 1 Cr by availing housing loan of Rs. 80 Lakh against which interest of Rs. 8 Lakh is payable in FY 2018-19. :

  1. If this property is the only self occupied house of Mr. Ram then computation of ‘Income from House Property’ shall be as under:

Income From House Property (HP) Rs.
Rent received /Gross Annual Value Nil
Less: Deduction u/s 24(a) towards Repairs & Maintenance @ 30% Nil
Less: Deduction U/s 24(b) towards interest Rs. 8,00,000/-

Restricted to Rs.

2,00,000
Net Loss under the head ‘Income from HP’ (2,00,000)

Even though interest paid is Rs. 8 Lakh, only Rs. 2 Lakh is adjustable against current year income & there is no benefit of balance interest payment of Rs. 6 Lakh, neither in this year nor in subsequent years.

  1. If the property is let out, say for an annual rent of Rs. 3 Lakh p.a. then computation shall be as under:

Income From House Property (HP) Rs.
Rent received /Gross Annual Value                 : 3,00,000
Less: Deduction u/s 24(a) towards Repairs & Maintenance @ 30% (90,000)
Less: Deduction U/s 24(b) towards interest on Housing Loan (8,00,000)
Net Loss under the head ‘Income from HP’ (5,90,000)
Less: Adjustable against other heads of income 2,00,000
Balance Loss c/f for set off against subsequent years income (3,90,000)

By virtue of amendment in the FA-2018, HP loss of Rs. 2 Lakh can only be adjusted against other heads of income and balance loss is allowed to be carried forward for 8 years for set off against HP income of subsequent years. As a result, in above illustrations out of the interest payment of Rs. 8 Lakh, Rs. 2.10 Lakh (i.e., 3.00 L – 0.90 L) is adjusted against rental income, Rs. 2 Lakh can be set off against other heads of income in the same year and balance Rs. 3.90 Lakh is allowed to be carried forward for set off in any of the subsequent 8 years HP Income.

Owning more than one house property- Present Law:

Presently, if taxpayer owns more than one house properties for self occupation then only one house property is considered as self occupied house property & the other house properties are deemed to have been let out. It means that tax is payable on notional rental income in such cases even without receipt of any actual rent. The choice of considering one property as self occupied and the other property as let out property is there with the taxpayers. Obviously, taxpayer can freely choose the self occupied property and deemed let out property in such a way so as to optimize the tax benefit as per his individual requirements.

In above illustrations, let us assume that said house purchased by Mr. Ram is his second house property & his first property is free from any housing loan liability. In such a scenario, it is advisable for Mr. Ram to treat the first property as self occupied property and second property as deemed let out property as it will enable him to take the benefit of interest deduction to the extent of Rs. 8 Lakh. Resultantly, he would able to (a) nullify the effect of notional income of Rs. 3 Lakh & (b) get the deduction of carry forward of loss to the tune of Rs. 3.90 Lakh as referred above.

Amendment by the Finance Act – 2019

Finance Act-2019 as passed by both the House of Parliament has offered immunity to the second house property from notional taxation. It means that if there are two house properties in the self occupation of taxpayer then nothing is taxable in the hands of the taxpayer on notional basis. The other side of amendment is that, interest deduction would be restricted to Rs. 2 Lakh and as such the benefit of carry forward of loss of Rs. 3.90 Lakh will not be available after the AY 2020-21.

Amendment by Finance Act -2019 is intended to offer immunity to the taxpayer from notional taxation in respect of second property. But it has its equivalent side effects as well. The benefit of adjusting entire interest against such deemed let out property would no more be available henceforth.

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