The Union Budget 2023 made the new tax regime quite attractive by reducing tax rates.
So, you have two options.
- 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
We saw that the New Tax Regime will be advantageous for salaried people unless they can claim tax deductions of Rs 4.25 lacs or more. 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. The only exceptions are Standard deduction and employer contribution to NPS, EPF, and superannuation fund.
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 under Section 24.
Yes, but not entirely correct.
You can still take tax benefit for interest payment on a home loan under the New Regime. But only for a let-out property. Not for a self-occupied property.
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.
Two types of deductions permitted.
- Standard deduction (of 30% of the Net Asset Value). Note: This standard deduction is different from the Standard deduction of Rs 50,000 for salaried employees.
- Home Loan Interest
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 (this is specified in Section 23). 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. Caps such set off at Rs 2 lacs per financial year. This cap would come into picture for let-out properties.
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.
If you had paid Rs 2.5 lacs in home loan interest for self-occupied property, Section 24 would cap the deduction at only Rs 2 lacs Hence, taxable income = Rs 8 lacs – Rs 2 lacs = Rs 6 lacs.
Interest of Rs 1.5 lacs (self-occupied property): Taxable income = Rs 8 lacs – 1.5 lacs = Rs 6.5 lacs
What changes in the New Tax Regime?
The new tax regime does the following:
- Disallows deduction of home loan interest paid for a self-occupied property. This is specified in Section 115BAC(2)(i)
- Disallows set-off of Loss Under Income from House Property. This is specified in Section 115BAC(2)(ii)(b)
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 the 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?
There are some differences in how annual income and home loan interest are treated for self-occupied and let-out properties.
Firstly, a let-out property will have some rental income.
Secondly, for a let-out property, 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.
In the Old Tax Regime
Let’s say your taxable income (before rental income) is Rs 15 lacs.
Loss under income from house property = Rs 3.5 lacs (but Section 71 caps the set off at only Rs 2 lacs)
Thus, your net taxable income = 15 – 2 = 13 lacs.
Note, in absence of home loan interest, your taxable income would have been Rs 15 lacs + Rs 2.5 lacs (from house property) = Rs 17.5 lacs.
Thus, home loan interest has reduced your income by Rs 4.5 lacs. Quite useful.
In the New Tax Regime
Here too, loss under Income from House Property = Rs 3.5 lacs
However, the new tax regime does not allow the set off of this loss against any other head under Section 71.
Hence, this loss goes waste but you have still been able to avoid paying tax on rental income.
In absence of home loan interest, you would have paid tax on taxable income of Rs 15 lacs + Rs 2.5 lacs (rental income) = Rs 17.5 lacs.
Because of interest, you do not have to pay tax on rental income.
Hence, you pay tax on only Rs 15 lacs. Taxable income reduced by Rs 2.5 lacs due to home loan interest. Or the tax benefit of Rs 2.5 lacs for home loan interest paid. Under the New Tax Regime.
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. And that’s your tax benefit.
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I am not a tax expert. You are advised to consult a Chartered Accountant before acting on the contents of this post.
This post was first published in February 2020 and has been updated since.