Budget 2017 Restricts Tax Benefits Enjoyed By Landlords

Finance Minister Arun Jaitley might have won many hearts when he announced in his Budget Speech 2017-18 that those earning under Rs 5 lakh annually will pay only five per cent as tax to the government as compared to 10 per cent earlier. Reports termed the move as one of the biggest income-tax reforms in the current times. He, however, caused much heartburn to those who are earning money by renting out their property.  

As his Budget Speech progressed, the finance minister, who was presenting the current government's fourth Budget, said: “In order to address the existing anomaly of interest deduction in respect of let-out property vis-à-vis self-occupied property, it is proposed to restrict set off of loss from house property against income under any other head during the current year up to Rs 2 lakh. The loss not so set off would be allowed to be carried forward for set off against the house property income for eight assessment years,” Jaitley said in his Budget Speech.

This announcement, which is largely aimed at equalising tax benefits enjoyed on self-occupied as well as rented out property, would greatly restrict the tax benefits a landlord enjoys on the interest paid for his rented-out property.

If you have bought a house taking a home loan and have rented it out, you are offered tax benefits under the Income-Tax Act. Thirty per cent of the rental income can be claimed under standard deductions, plus municipal taxes paid for the property. Apart from that, you enjoy deductions on the interest paid on the loan you have availed of. 

Citing an Ernst and Young analysis, The Economic Times says: “After these deductions, often the rental income becomes zero or negative and is called loss from house property in the latter case. Such loss is currently allowed to be set off against other heads of income such as salary without any limit. This arrangement currently allows the tax-payer to substantially save on his total income tax payable on rental income as well as total income.” This changes now.

Sample this.

Assume Suresh Mehta has an annual income of Rs 50 lakh. He owns a property in Noida and earns an annual amount of Rs 4.20 lakh as rent while pays Rs 10 lakh as home loan interest on the said property. Considering he gets a standard deduction of 30 per on the net annual value of his rented property' (Rs 1.23 lakh) and pays Rs 10,000 in the form of municipal taxes, Mehta will be eligible to show Rs 7.13 lakh as loss from the house property. The new announcement limits this to Rs 2 lakh now. Overall, Mehta will have to shell out more as taxes on his annual income.

Let out @ Rs 35,000 per month	Existing	Post Budget
Particulars	Amount (in Rs)	Total Deduction (in Rs)	Loss from House Property eligible to be set off	Total Deduction (in Rs)	Loss from House Property eligible to be set off
Income	4,20,000			4,20,000
Municipal Taxes paid	10,000	10,000		10,000
Standard deduction @ 30% of NAV	1,23,000	1,23,000		1,23,000
Interest on borrowed funds u/s 24	10,00,000	10,00,000	7,13,000	10,00,000	2,00,000

It is worth mentioning here that in the case of self-occupied properties, owners are currently allowed to claim interest paid up to Rs 2 lakh on home loan as a deduction from other heads of income.