Pre and post-Budget 2019: How tax benefit changes for individuals with 2 home loans

At present, if you have more than one property for self-occupation, then only one of those, would be considered as self-occupied property for taxation purposes.

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Interim Budget proposes that from FY 2019, both house properties would be considered as self-occupied.
The interim Budget 2019 has proposed to treat the second house owned by an individual as self-occupied and thereby removed the necessity of paying tax on notional rent. This new provision will be applicable from financial year 2019-20 onwards subject to the Bill being passed by the Parliament.

At present, if you have more than one property for self-occupation, then only one of those (as chosen by you), would be considered as self-occupied property for taxation purposes. The other self-occupied house property/properties would be considered as deemed to be let-out and the notional rent needs to be offered to tax.

Tapati Ghose, Partner, Deloitte India says that as per the provisions of the Income Tax Act, interest on housing loan can be claimed as a deduction while computing the taxable income. The deduction is limited to Rs 2 lakh for self-occupied house property, subject to underlying conditions, whereas there is no upper limit on the amount of interest that can be claimed as deduction for let-out house property. "In case of let-out house property, the net annual value of the property is derived by considering gross annual value after deduction for municipal taxes paid during the year. Also, an additional standard deduction of 30 percent on the net annual value is allowed along with deduction for the interest on housing loan," she said.


Let us assume that an individual has two house properties with separate home loans taken for both for each of the properties.

Current Scenario 1: One self-occupied and one let-out house property
The interest on housing loan can be claimed as a deduction up to Rs 2 lakh for a self-occupied house property and there is no limit for the let-out house property. If the computation results in loss from the two-house properties, then maximum Rs 2 lakh can be set-off against other heads of income and balance can be carried forward for 8 assessment years. And, this loss can be used to set-off income from house property only.

Current Scenario 2: Two let-out properties
The entire interest on housing loan can be claimed as a deduction from income from the two-house properties and there is no upper limit on the amount of interest that can be claimed as a deduction. However, if the computation results in loss from two house properties, then maximum Rs 2 lakh can be set-off against other heads of income and balance can be carried forward for 8 assessment years.

Particulars Scenario 1 Scenario 2
Self- occupied Deemed Let out Let out-1 Let out-2
Gross Annual Value (GAV) 0 3,60,000 2,40,000 3,60,000
Less: Municipal Tax Paid 0 10,000 5,000 10,000
Net Annual Value (NAV)`` 0 3,50,000 2,35,000 3,50,000
Less: Standard Deduction (30% of NAV) 0 1,05,000 70,500 1,05,000
Less: Interest on housing loan 2,50,000 4,00,000 2,50,000 4,00,000
Income/loss from house property (2,00,000) * (1,55,000) (85,500) (1,55,000)
Total loss from house property (3,55,000) (2,40,500)
Set-off against other income 2,00,000 2,00,000
Balance loss to be carried forward for 8 assessment years 1,55,000 40,500
Source: Deloitte India

Assumptions
-- ^Where an individual has a self-occupied (no loan) in addition to 2 let out house properties, then the tax implication would be the same as mentioned in 'Scenario 2.'

-- *Rs 30,000 per month considered as rent for let out & let out-2 property. And, * Rs 20,000 per month considered as rent for let out -1 property.

-- *Deduction for interest on housing loan can be claimed only up to Rs 2 lakh in case of self-occupied house property and there is no limit for let out house property. The interest on housing loan considered for let out and let out-2 is Rs 4 lakh and for let out-1 is Rs 2.5 lakh for the entire year.

-- The net annual value in case of self-occupied house property is NIL as per income tax act irrespective of municipal tax has been paid or not.


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There is no change in the computation mechanism in the above 2 scenarios as per the current provision versus the amendment in the interim Budget.

Scenario 3 Current provision vs provision as proposed to be amended by interim Budget 2019
As per the current provision
Only one house property can be considered as self-occupied house property and the other property has to be considered as deemed let-out property if it is lying vacant. The notional rent has to be offered to tax in case the deemed let-out property and deduction for municipal tax paid, standard deduction and deduction of interest on housing loan can be availed.
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Ghose said that the taxpayer is at liberty to choose any property as self-occupied house property based on whichever property fetches the maximum benefit. "The interest on housing loan can be claimed up to Rs 2 lakh for the self-occupied house property and there is no limit for the deemed let-out house property. If the computation results in loss from the two-house properties, then you can set-off maximum Rs 2 lakh against other heads of income and the balance can be carried forward for 8 assessment years starting from the next AY 2019-20," she said.

Amendment as per the interim Budget
Interim Budget proposes that from FY 2019, both house properties would be considered as self-occupied and notional income (basis deemed to be let-out) would not trigger in this case. The total interest on both the home loans (self -occupied properties) that can be used as deduction is limited to Rs 2 lakh.

S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys let us say the taxpayer has two properties, one in Mumbai and the other in Delhi, both of which were bought using home loans. After the amendment is made as per the interim Budget 2019, the lettable value (the value at which the property might reasonable be let out) of both the properties will be deemed to be NIL. Section 24 of the Income-tax Act, 1961 has correspondingly been amended to provide that the deduction of interest paid in respect of both the properties, in aggregate will be restricted to Rs 2 lakh only. "Therefore, the aggregate deduction in respect of interest paid in respect of two properties, income from which is not taxed, will be restricted to Rs 2 lakh per year, he said.

Scenario 3 Current provision Proposed amendment in Budget
Particulars Self- occupied Deemed Let out Self- occupied-1 Self- occupied-2
Gross Annual Value (GAV) 0 3,60,000 0 0
Less: Municipal Tax Paid 0 10,000 0 0
Net Annual Value (NAV) 0 3,50,000 0 0
Less: Standard Deduction (30% of NAV) 0 1,05,000 0 0
Less: Interest on housing loan 250,000 4,00,000 2,50,000 4,00,000
Income / loss from house property (2,00,000) (1,55,000) (2,00,000) (2,00,000)
Total loss from house property (3,55,000) (2,00,000) #
Set-off against other income 2,00,000 2,00,000
Balance to be carried forward for 8 assessment years 1,55,000 NIL
Source: Deloitte India

Assumptions
*Rs 30,000 per month considered as notional rent for deemed to be let out property
#The deduction of interest paid in respect of both the self-occupied properties, in aggregate will be restricted to Rs 2 lakh.


Impact on your tax savings
Vasudevan says that the amendment of exempting income from two house properties (and corresponding amendment to restricting deduction of interest) may result in the taxpayer paying more tax (in later years due to restriction imposed on carry forward on total loss from the two self-occupied properties) than what was paid before the Budget. This may happen in cases where the lettable value of the second property is less than the interest paid by the taxpayer for such property. "In such cases, prior to Budget, the taxpayer would have claimed deduction of the entire interest paid in respect of such property and would have set-off or carried forward the loss from such property. However, post-amendment, since the deduction of interest will be restricted to Rs 2 lakh in aggregate, the taxpayer will not be eligible to claim set-off or carry forward of such loss and thereby resulting in higher tax," he said.

Things you should know
  • Interest on housing loan can be claimed as a deduction only if the house property is constructed or purchased and ready to be occupied.

  • Interest paid prior to completion of construction of the property can also be claimed as a deduction over 5 years from the year of completion of construction. When the construction gets completed a completion certificate is issued after which you will also have to get an occupancy certificate, which is a must.

  • In case of property held jointly, the income from house property to be taxed in the hands of each co-owner is determined based on the share of contribution as per the provisions of the Act. For claiming deduction, you need to submit the home loan interest certificate. This document contains information of ownership share, borrower details and EMI payments split into interest and principal.

  • If a house property is self-occupied for part of the year and let out for other part, then the house property would be considered as let out property for the entire year.
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