Budget 2021

Let out your house? You can still claim interest deduction under new tax regime

Vivek Ananth, Anand Kalyanaraman BL Research Bureau | Updated on February 06, 2020

But there are other restrictions that you should take note of

The proposed, optional new personal tax regime has lower tax rates but only if you forgo some key tax breaks. One such deduction that is not allowed is the interest on home loan.

But the fine-print in the Budget documents says that this rule applies to self-occupied property only. By implication, interest paid on home loan for a let-out house will be allowed as deduction even under the new regime.

Tax experts confirm this. “Under the new tax regime, taxpayers who own a house that is rented out will be able to claim deduction on the interest they pay for buying that house against the rental income,” says Aarti Raote, Partner at Deloitte India.

Also, the usual standard deduction of 30 per cent on net rental income will continue in the new regime.

The catch

But there are other restrictions on tax breaks on let-out property under the new regime. One, if interest deduction results in a loss under the head “income from house property”, this loss cannot be set off against any other head of income such as salaries, in the new regime. In the old regime, this is allowed up to ₹2 lakh a year.

Also, in the new regime, loss under the head “income from the house property” cannot be carried forward to subsequent years for set-off purposes. This is allowed under the old regime.

All this means that in the new regime, a taxpayer who has let out his house can reduce his taxable rental income, thanks to the interest deduction, but the benefits still pale when compared to the old regime. This is essentially because if the interest cost exceeds the net rental income, the resultant loss from house property can neither be set-off against other heads of income nor carried forward to future years, in the new regime.

Shailesh Kumar, Partner – Direct Taxation at Nangia & Co LLP, explains, “In case the amount of such interest is less than net rental income (after allowing standard deduction of 30 per cent), then full deduction will be available even under the new scheme. Also, if a person has more than one house property, then loss from one house property on account of home loan interest can be set off against rental income from another house property, to the extent it does not result in a total ‘net loss’ under the head house property.”

He adds, “(But) in case there is a net loss under the head “income from house property”, after intra-head set-off, the taxpayer can neither set it off against any other head of income in the same year, nor carry it forward to the future years, as the full effect of such loss shall be deemed to be given (in that year itself)”.

Published on February 06, 2020

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