Income from property: Impact and expectations

As we fast approach the big day when the maiden Budget of the re-elected NDA government would be tabled, expectations of the common man are soaring. One of the areas where many people are hoping to see some change is house property taxation.

Changes in the interim Budget

The interim Budget 2019 gave some tax respite to individuals owning two house properties that have not been let out.

Prior to the interim Budget, if one had more than one self-occupied house property, then notional rent for the additional property was computed and taxes on the same were required to be paid.

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The notional value of the said property arrives on the basis of the fair rental value that a similar property would fetch which was often the bone of contention. Thus taxpayers had to pay tax on the house property lying vacant or occupied by any other family member and no income was generated.

In the interim Budget of February 2019, considering the socio-economic conditions whereby one may have had to maintain houses at two locations on account of their job, children’s education, care of parents, relief was provided to individuals by way of exemption of levy of income tax on notional rent on the second self-occupied house.

Accordingly, individuals can now own up to two self-occupied house properties and not pay any tax on notional rent on the second self-occupied house property.
Though the amendment provides some relief by not taxing notional rent on the second self-occupied house property, it nevertheless has some drawbacks. Earlier house owners were claiming the total interest on housing loan as a deduction against such notional rent, subject to an overall limit of house property loss of Rs 2 lakh. This deduction for home loan interest against the two self-occupied house properties now is restricted to Rs 2 lakh.

Illustration

In the above illustration under the first scenario, housing loan interest deduction is permissible without any restriction. While there is a cap on the aggregate house property loss that could be set off against other income, i.e Rs 2 lakh, the individual could still carry forward the balance loss of Rs 123,000 to next eight tax years. In the second scenario, there is a cap of Rs 200,000 on the interest deduction in aggregate for both the properties, even while the taxpayer has paid interest of Rs 575,000. This results in current year loss of Rs 200,000 and leaves no room for carrying forward of loss (interest costs) to future years.

Another controversy here is whether all vacant second houses can be treated as ‘self-occupied’. Some experts believe that only property which is either occupied by the owner or his family members or which cannot be occupied owing to the taxpayer’s work place being at a different location can qualify this benefit. In any other case, such property would continue to be considered as let out and the notional rent provisions would apply. It would be helpful to gain some clarity on this.

Let us now take a sneak peek into a wish list of tax sops from the upcoming Budget:

Deduction for housing loan interest

The existing limit of deduction of Rs 2 lakh for home loan interest for the self-occupied property could be increased in view of the increased housing cost and the consequent surge in the loan EMIs.

Further, the existing provisions provide a deduction for pre-construction interest in five instalments which is also included in the overall limit of Rs 2 lakh for self-occupied house property. Most taxpayers are unable to benefit from the pre-construction interest deduction. Hence, the deduction for interest payments could be enhanced to provide some relief to taxpayers and enable them to avail a larger tax break for interest costs and make housing affordable.

Restoring the set-off

Budget 2017 brought in drastic changes by bringing in the restriction on set-off of house property loss. The total loss that can be allowed under the head house property is only to the extent of Rs 2 lakh from FY18 onwards and remaining loss, if any, can be carried forward to future years. Though the amendment was said to be brought in line with the international best practices, taxpayers in India are facing genuine hardship as their housing losses are capped despite incurring huge home loan interest costs. It is expected that the tax regime of pre-2017 era be restored, which can provide some respite in this inflationary economy.

Interest Deduction

One serious concern that a taxpayer's faces is reduced the limit of deduction of Rs 30,000 for the housing loan interest paid if the construction of the property is not completed within 5 years from the end of the financial year in which the loan is taken. In large cities and towns, construction projects involving high rise towers, generally take a longer time to complete. An amendment in the current provision on the time threshold will provide some relief to genuine taxpayers facing such hardship.

Though the wish list could be never-ending, let us hope that the above suggestions get featured in the Budget fine print. This will encourage more buyers to invest in property and give the much-needed impetus to the housing sector as well as stabilise interest rates.

(Aarti is the partner, Ratna a Director and Abha is Assistant Manager with Deloitte Haskins and Sells)