New tax regime allows deduction of interest on home loan on rental property

By Abhishek Soni

For taxpayers who have an on-going home loan, the interest paid on such loans helps them lower tax liability in the existing income tax structure. However, under the new income tax regime proposed in Budget 2020, the interest paid on housing loan is not available for deduction for self-occupied houses. But for taxpayers who have rented out their house property, there is good news. Interest paid on housing loan taken for a rented out property can be claimed as deduction under section 24(b) even in the new proposed tax regime

Budget 2020 has proposed a new tax regime with lower tax slab rates along with removal of almost all deductions, exemptions. A tax payer has been given the option of moving to this new regime for fiscal 2020-21 or continuing with the existing income tax structure. While most tax breaks are not available in the new tax regime, tax break on interest paid on housing loan for rental property can still be claimed

Here's is all you need to know about claiming this deduction in the proposed tax regime and what you need to be careful about while claiming this deduction.

• Let Out/deemed to let out house property

If you have let out your house property and are earning a rental income, then you can claim deduction of the home loan interest paid on such property from the rental income earned. Thus, even under the new tax regime, taxpayers who are landlords can claim the tax-benefit of the interest paid.

Here is the benefit that landlords can claim under the proposed new tax regime:

• They can claim a standard deduction of 30% from the net rental income. Net rental income would be the total rental income (i.e. higher of expected rent or rent received / receivable ) in a financial year less the municipal taxes paid in the financial year
• After claiming the standard deduction as mentioned above, they can deduct the interest paid on home loan taken for the property which is rented out.

The final value arrived at after deducting standard deduction and interest paid on housing loan would, therefore, lower the taxable income from house property and help in bringing down the overall gross total income and final tax liability.

• Self Occupied House property

Taxpayers should remember that the new tax regime does not allow the deduction of the home loan interest paid for a self-occupied house property. However, under the existing tax regime, the deduction of the home loan interest paid for a self-occupied house property is allowed up to Rs 2 lakh which results in reduction of tax liability.

Let us understand this better with an example: You own two houses properties both have on-going home loans. One house is used by you for your own living purpose and another house is given on rent. In such a scenario, the interest paid on your house will not be eligible for deduction in the new tax regime. On the other hand, you can claim deduction on the housing loan interest paid and standard deduction from rental income from the second house.

What to look out for?
Though the deduction for home loan interest is in the favour of landlords, however, one should be careful while claiming such deduction. There are two rules in the new tax regime which are a setback in case you incur a loss on your house property (i.e. interest payment exceeds the rental income). These are as follows -

Set off of losses: If the interest paid on the home loan in a financial year exceeds the rental income earned, then it would result in a loss under the head of income from house property. This loss cannot be set-off against any other head of income such as salary, interest income and capital gains etc. as per the rules of the new tax regime. Therefore, you cannot further reduce your taxable income with the loss suffered by you on your house property. Under the existing tax regime, however, set-off of losses from house property for up to Rs 2 lakh is allowed.

Carry forward of losses: As per Finance Bill, 2020, the loss from the let out house property cannot be carried forward to subsequent financial years under the new tax regime. However, a different view is given in the Memorandum to the Finance Bill, 2020 whereby it is given that a taxpayer can carry forward the losses from a let out house property to the subsequent years as per extant law.

As per our opinion, Finance Bill 2020 will prevail over memorandum which does not allow carry forward of loss from house property under the new regime. A clarification from the government would be welcome in this regard.

Conclusion
So, if you have a house property which has been rented out, you can claim a standard deduction as well as a deduction for home loan interest paid from the net rental income. However, you should be careful in case of a loss. In such cases, the old tax regime can prove to be more beneficial. Since the new regime is optional, calculate your tax liability on your income from house property under both the regimes and then choose the regime which gives you the maximum tax benefit.

(The writer is founder & CEO of Tax2win.in - an ITR filing website)