Earlier, whatever interest that a borrower paid against a housing loan, was allowed to be completely adjusted from the income, as a deduction. Now, this deduction has been capped to Rs 2 lakhs and any surplus loss can be carried forward for the subsequent 8 years.
Here, it is important to point out that if a person has more than one property, then, the Income Tax (I-T) department considers one property as self-occupied and the rest as let-out.
Impact of the cap on interest deduction
“For example, if the interest paid on a let-out property was Rs 6 lakhs per annum and the rental income was Rs 2 lakhs, then, the entire loss of Rs 4 lakhs was previously allowed to be set off against other heads of income, in the same assessment year. Now, the same has been capped at Rs 2 lakhs in a year and the balance loss of Rs 2 lakhs can be carried forward in the subsequent 8 assessment years. This will mean higher tax outgo in the current financial year,” explains Ajay Jain, executive director – investment banking and head real estate group, Centrum Capital Limited. This cap will significantly affect the income tax outflow of people, who have a huge interest component in their home loan EMIs.
Nevertheless, experts maintain that real estate continues to be one of the sectors that provides investors with good returns. Hence, this revision will not wipe out investments in this sector. Moreover, the emphasis on affordable homes in the form of interest rebates and subsidies, would make it easier for end-users to invest in real estate.
Adhil Shetty, CEO, BankBazaar.com points out that the deductions under Section 24, are applicable to the interest payable on the home loan and not the entire EMI.
“Consider a loan of Rs 50 lakhs for a period of 20 years at 9% interest. Your EMI would be Rs 44,986. In the first 10 years, the bulk of your EMI would be the interest and in the next 10, the interest component would be lower than the principal repayments. In other words, initially, out of the Rs 5,39,834 that you pay in a year, approximately Rs 1 lakh would be towards principal repayment and Rs 4.4 lakhs towards the interest. However, by the 10th year, it would be Rs 2.5 lakhs towards principal repayment and Rs 2.9 lakhs towards interest. Assuming that the rent will increase over this period, the offset amount will reduce over time. So, the 8 years’ time to set off the loss against income from house property, will provide some relief to the customers,” he elaborates.
Impact on taxable amount
Let us assume that a property is let out for a monthly rental of Rs 20,000. Consider a loan of Rs 60 lakhs for a period of 20 years at 8.5% interest, on the property.
|Details||Amount||Deduction||Set off due to loss from property||Deduction||Set off due to loss from property|
|30% standard deduction on net annual value||69,000||69,000||69,000|
|Home loan interest paid||4,95,777||4,95,777||-3,34,777||4,95,777||-2,00,000|
|Your taxable amount goes up by Rs 1,34,777|
(Amounts mentioned are in rupees)
The main purpose of the move to cap the interest amount, seems to be to promote first-time home buyers and provide them with more space, in comparison to the investors. With lesser investors participating in home buying, property prices could fall. This will eventually be beneficial to the end-users.