The Union Budget 2020 gave a choice of tax regime to the taxpayers.
- Continue with the old tax regime and keep taking tax deductions. OR
- Opt for the new tax regime (lower taxes) but don’t take tax deductions
As a taxpayer, you can calculate tax liability under both the regimes and opt for the one with a lower tax liability.
Under the new tax regime, all the common deductions are disallowed.
There is an impression that, if you opt for the new tax regime, you won’t get tax benefit for the interest paid on a home loan. Even I mentioned that in my post on Budget 2020. Now, that is not entirely correct. You can still get tax benefit for the interest paid on a housing loan in some cases. How? Let’s find out.
Section 24: How Tax Benefit for Home Loan Interest works?
You get tax benefit of Rs 2 lacs for interest paid for a housing loan. That’s right.
We must understand how this tax benefits actually works. Unlike other tax deductions, a few sections of the Income Tax Act come together to give you this tax benefit. Section 23, Section 24, Section 71 and Section 71(B) for carry forward.
Section 23 specifies how to calculate Income from House Property. It specifies that the Income from House Property for a self-occupied property is NIL and that you can have up to 2 self-occupied properties. Rent (or the notional rent from the remaining properties (let-out or deemed let-out) will be added to the Income (from house property).
Annual Rental Income – Municipal Taxes = Net Annual Value (NAV)
Section 24 specifies the deductions that are allowed from Income from House Property. Apart from standard deduction (30% of the Net Asset Value), you can take deduction for the interest paid.
In addition, Section 24 caps the deduction for cumulative interest paid on all the self-occupied properties to Rs 2 lacs. Section 24 places no such cap for let-out or deemed let-out property.
Income from House Property = Net Annual Value – Standard Deduction (@30% of NAV) –Interest on Home Loan
For a self-occupied property, the rental income is considered NIL. Now, let’s say you pay home loan interest of Rs 2.5 lacs. The maximum deduction for interest payment for a self-occupied property is Rs 2 lacs.
Income from House Property = 0 – Rs 2 lacs (interest) = – Rs 2 lacs
This is your Loss under Income from House property.
Section 71 allows for set-off of Loss under Income from House Property against other heads of Income. Therefore, if your salary is Rs 8 lacs, you can set off loss under income from house property against this salary. Your taxable income goes down from Rs 8 lacs to Rs 6 lacs.
This is how tax benefit of Rs 2 lacs for home loan interest payment comes about.
The new tax regime (if you opt) does the following:
- Disallows deduction of home loan interest paid for a self-occupied property
- Disallows set-off of Loss Under Income from House Property
Under the new tax regime, the tax deduction for home loan interest (24b) for a self-occupied property is not allowed. Thus, if you have one (or two) self-occupied properties and you opt for the new tax regime, then you will not be able to take any benefit for home loan interest. Thus, the entire home loan interest paid for a self-occupied property goes waste from tax-saving perspective.
However, this does not mean you can’t take tax benefit for home loan interest under the new tax regime. You can, but only for a let-out (or deemed let-out) property.
How is a Let-out property different?
Apart from the fact that you don’t reside in the let-out property, there are some differences on the tax front too.
Firstly, a let-out property will have some rental income.
Secondly, Section 24 does not put any cap on the interest deduction that you can take. For a self-occupied property, the cap is Rs 2 lacs. The new tax regime does not disallow interest deduction for a let-out property.
Let’s say your rental income (after municipal taxes and standard deduction) is Rs 2.5 lacs. Interest paid for home loans on those properties is Rs 6 lacs.
Income from house property = Rs 2.5 lacs – Rs 6 lacs = – Rs 3.5 lacs
Therefore, the loss under Income from House Property becomes Rs 3.5 lacs.
Section 71 puts an additional restriction (not discussed earlier). It caps the set-off of Loss under Income from House Property to Rs 2 lacs.
Therefore, even under the old regime, you would be able to set off loss of only Rs 2 lacs. However, if you see, you have gotten the tax benefit for interest payment of Rs 4.5 lacs. 2 lacs for set-off + 2.5 lacs to nullify rental income. If the interest was not there, you will have to pay tax on this rental income of Rs 2.5 lacs.
Under the new tax regime, set-off of loss under Income from House Property is not allowed. However, you can still use it to nullify rental income from a let-out property. Continuing with the same example, you can still use home loan interest paid to cancel out rental income (after municipal taxes and standard deduction). If you opt for the new regime, you still get benefit for interest paid. Rs 2.5 lacs in this case.
I am not a tax expert. You are advised to consult a Chartered Accountant before acting on the contents of this post.