New tax slab and its possible impact on the home buyers

In Budget 2020, people demanded to lower the tax rate, more deduction support, that’s it! However, surprisingly the FM came up with a new tax slab during the Budget 2020. The new tax system will not phase out the existing tax system; both will work in tandem. The taxpayer will get the option to stay with the current tax system or switch to the new tax system.

The new tax system has invoked a mixed response from the home buyers and the realty sector. We looked deep into the implication of the new tax system on the home buyers. We analysed how it may impact the existing and prospective home buyers as well as the investors.

More disposable income for the middle class

Mr. Farshid Cooper, MD, Spenta Corporation, “The most telling thing to come out of Budget 2020 is the tax relief to individuals. The amended tax slabs will ensure more disposable income in the hands of the middle class. This could lead to reviving the consumption cycle in the realty sector and kickstarting the economy. Further, with additional savings, individual investments in housing, especially affordable housing, could see an uptick in the near future”.

Many taxpayers don’t want to invest in the tax-saving scheme. They do it because otherwise, they’ll land up paying more tax. The new tax system will allow them the opportunity to separate their investment from tax planning. Taxpayers in the middle-lower category will get more disposable income in hand in comparison to the existing tax system (if they are not exhausting tax deduction u/s 80C, Sec 24).

The taxpayers who are not already investing in the tax saving schemes and who don’t have long-term investment commitment, they are at a better position to select between existing and new tax system.

Existing home loan borrowers better with the existing tax system

Shubham Jain, Group Head & Senior Vice President, Corporate Ratings, ICRA Ltd, says, “The non-applicability of the deduction on housing loans under the new optional individual tax structure can act as a significant deterrent for those contemplating availing housing loans.”

The taxpayers who have already bought a home on loan and claiming various deduction benefits such as u/s 80C, 80D, Sec 24, etc., for them switching to the new tax system could result in higher tax outgo. Similarly, individuals who have committed to investing in a tax saving product like traditional insurance policy to claim tax deduction benefit, they may find it difficult to switch to the new tax system.

Planning to invest in property? Opting new tax system may not be a bad idea

It would be essential to mention here that under the new tax slab, the home buyers are allowed to claim a deduction against interest on home loans for the rented property. So, Sec 24(b) deduction for interest on the loan for property put on rent won’t go away! Also, the standard deduction of 30% of the rental income will remain as it is.

According to the Finance Bill 2020, a loss incurred from the rented-out property won’t be eligible for carrying forward under the new tax system. On the other hand, Memorandum to the Financial Bill 2020 mentions that the taxpayer can carry forward the losses to the next years. So, there is confusion about whether the loss from the let-out property can be carry-forwarded or not. If the loss carrying forward is restricted, then the existing tax system would turn out to be much more attractive than the new tax system.

The investment in property for more than 2 years are considered as LTCG, and it is taxed at 20% with indexation benefit. So, investment in the property will continue to offer you the lower tax benefit on LTCG and deduction u/s 24(b) (against rental income).

Planning to buy your first home? You may avoid switching to the new tax system

If you are planning to buy your first home then by continuing with the existing tax system you can claim deduction benefits u/s 80C up to Rs 1.5 Lac against principal repayment on home loan, u/s 24 Rs 2 Lac against interest payment on home loan, and if it is an affordable property (up to Rs 45 Lac value as per stamp duty) then deduction of an additional Rs 1.5 Lac against interest payment. So, the total deduction benefit could go up to Rs 5 Lac (while not considering other deduction benefits like 80E, 80D, etc.). So, by staying with the current tax system, you can save a considerable tax amount in comparison to the new tax system.

What should you do?

Experts believe that the new tax system has been introduced as a step towards introducing the Direct Tax Code (DTC). In the future, it may be tweaked to make it more attractive for the taxpayers.

Individuals with salary income are allowed to switch to the new tax system and return to the existing tax system again in the future. However, switching back is not permitted to individuals having non-salaried income. Still, if you plan to opt for the new tax system, look at its impact on your future financial planning. Currently you may not be availing a home loan or education loan facility, but in the future, you may need it. So, if you want the answer to whether you should switch to the new tax system of stay with the existing one, the answer would be ‘Look at the possible impact of both the tax system on your financial goals’ to make the right decision!