A home for the common man

Given the higher tax outgo for buying a second house, HNIs may look elsewhere for investment, making more housing units available for the middle class. A look by R.P. Deshpande

As per the Finance Bill 2017, there is a significant change in the way an assessee (tax payer) can set-off loss towards house properties owned, other than self-occupied house property.

Hitherto the entire interest paid on loan taken for house property other than self-occupied property was allowed as deduction after appropriating the rental income earned, under Section Sec 24 of the IT Act. From the present financial year, loss from house property (other than self-occupied house), if any, is restricted to ₹ 200,000 pa, under the newly inserted sub-section 3A of Section 71 of the Income Tax Act. The surplus loss, if any, can be carried forward to the next 8 years and can be set-off from income from house properties. However, on self-occupied property, deduction allowed for interest payment on the loan taken remains restricted to ₹ 200,000 pa.

The following illustration will show the effect of capping the loss from house properties to ₹ 2 lakh. Krishnamurthy owns two houses in Bengaluru, one is self-occupied and the other is let out. Both have been purchased with home loans of ₹ 60 lakh and ₹ 90 lakh, at 9.5% interest.

During financial year 2016-17, on the self-occupied property, he has paid interest of ₹ 555,000 on the home loan. And on the property rented out, he has paid interest of ₹ 848,000. During the year Mr. Murthy had taxable income of Rs. 27 lakh. Rent received was Rs. 25,000 pm.

During financial year 2017-18, on the self-occupied property, he will be paying interest of ₹ 543,500. And on the rented property, he will be paying interest of ₹ 832,500. During the year, Mr. Murthy has taxable income of ₹ 30 lakh. Rent received will be ₹26,000 pm.

Now let us compute the income tax for both years and analyse how the new rule of capping loss from the second house to ₹ 2 lakh is affecting the tax payable amount. The tables show that the asssessee’s tax outgo increases by ₹ 220,420, as compared to the previous year, mainly due to capping of loss from let-out property to ₹ 200,000.

Thus, considering higher tax outgo, as above, every individual who plans to invest in a second house will think twice and may divert his savings to other investment alternatives.

The media is extensively writing that this move of capping loss from house property is a negative approach. This sentiment is adding to the problems of builders and developers who are sitting on a huge pile of unsold inventory of ready-to-move-in apartments. If people are not coming forward to buy a second house, the situation may worsen.

But analysts have to look at the issue in a broader sense. In the absence of tax incentives also, the investment in real estate assets (second house) is a lucrative option, as house property offers good returns by way of higher capital appreciation and decent periodical returns by way of rentals, which go on increasing year on year, beating the inflation.

On logical thinking, everyone will agree that any financial assistance / subsidy / tax sops from the government should reach the needy people for the right cause. Providing tax sops for acquisition of second house is surely used for speculative gains by a few thousands, whereas millions of people from the middle class and lower income group are not able to buy a decent shelter of their own.