De-Tax. Should rental income earners shift to the new tax regime?

The new personal income tax regime, which kicks in from FY21 but is optional, allows you to pay lower tax if you forego exemptions and deductions. Salaried individuals can indicate their choice of either migrating to the new regime or continuing with the existing practices to their employers in the beginning of the financial year.

If rental income is a large part of your total income in a financial year, the new tax regime can impact your tax planning.

So, it is prudent to crunch the numbers before you choose your option.

Forego deductions

Say, you earn an income of ₹20 lakh from your salary, and ₹2 lakh a month rent from two houses (₹1 lakh each).

One house you inherited and the other one is owned jointly with your spouse on which you both share the home loan repayment. You also carried forward loss of ₹1 lakh on the first property. On the second house, your share of interest repayment for the financial year is ₹1.2 lakhand principal repayment is ₹1 lakh.

You live in a house that you bought using a home loan that you repay on your own. Your yearly interest payment for 2020-21 on the home loan you took to buy your third house comes out to around ₹1.6 lakh and principal payment of around ₹1.28 lakh.

For the sake of simplicity, in this example, you do not make any tax-saving investments, nor do you claim any other deductions from your income.

Higher tax outgo

Under the new regime, you will not get a deduction for your principal repayment either for the self-occupied home or for the rented-out property.

While you will get a deduction for interest paid on the home loan for your rented-out house, there will be no deduction on interest on home loan repaid for self-occupied house under the new regime.

Any loss from house property you incur during the current financial year can be set off only against income from house property. You will not be allowed to be set off such loss against any other head of income.

You also cannot carry forward to future years any loss on house property that you are unable to set off against income from house property.

Do remember, this is only applicable if you continue to choose the new regime in future years as well.

The accompanying tables show the comparison of the tax outgo if you choose to continue under the old regime or if you opt for the new regime of taxation for individuals.

Even if your salary income is lower at ₹15 lakh or ₹12 lakh for the same scenario mentioned above, there is a higher tax outgo. So, those of you who make a large amount of money from rental income, be wise when it comes to opting for the tax regime from this year onwards.

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