Home Loan Changes in Budget 2017
Among the many changes proposed by Finance Minister ArunJaitley in his Budget 2017-18 speech, the change which affects majority of us is the change in the benefit of home loan.
As per current tax laws applicable up to FY 2016-17, for house properties rented out, a borrower could deduct the entire interest paid on home loan after adjusting for the rental income. For self-occupied properties, however there was a capping of Rs 2 Lakhs.
With effect from financial year 2017-18 (beginning from 1st April 2017), the government has cut down this extra tax benefit being enjoyed by the house property owners renting out their properties, over the self-occupied properties. According to the proposed change on rented properties, the home loan borrowers can only claim deduction of up to Rs 2 Lakh per year ‘after adjusting for the rental income’. And the amount above Rs 2 Lakh can be carried forward for next 8 assessment years. Practically this becomes redundant, at least in the initial years of loan, due to each year likely to have its own carry forward amount. Please remember that the home loans are typically front loaded and most of the home loan interest is paid to the home loan agency in the initial years – in later years, it is primarily the principal part.
The provisions of setoff and carry forward of losses state that while adjusting the carried forward losses and loss of the current year, the priority will be given to the current year loss over the carried forward amount, meaning thereby that the ‘Interest paid/accrued during the current year will be first adjusted and then the amount brought forward from previous years’. This is another clever way to restrict the tax benefit and it might so happen that the carried forward ‘losses’ of the previous years may actually not get utilised in any meaningful manner even much later.
Let’s simplify and differentiate the new and old provisions for the rented properties with an example:-
|New Provision (Rs)|
|Rent from House Property (after 30% allowed as Standard Deduction) : (A)||3,00,000||3,00,000|
|Interest paid on Home Loan : (B)||7,50,000||7,50,000|
|Loss available for setoff against other taxable income : (C) i.e. (A-B)||4,50,000||4,50,000|
|Capping of setoff from other income : (D)||Unlimited||2,00,000|
|So, Amount claimed as loss and reduced from gross yearly income: (E) i.e. least of C and D||4,50,000||2,00,000|
|Tax saved if in 30% bracket||1,39,050||61,800|
|Amount carried forward for subsequent 8 years for setoff against income from house properties : (F) i.e. C-E||Nil||2,50,000|
[Please note that all the figures given above are Yearly amounts.]
We expect that this move will dampen the demand and decrease the lure for buying a second house property on loan for the purpose of earning rental income and setting off the full interest liability against the let-able value of property.
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