What if the second house loses the status of a deemed let out property?

What if the second house loses the status of a deemed let out property?
Apr 2019 , by , in FEATURES, Latest News

 

The interim Budget proposes to allow two house properties being considered as self-occupied property. Thus, the deemed rent is no longer considered taxable but, this amendment is likely to have an adverse impact from a taxation point of view.

 

Text: Tapati Ghose, Partner, Deloitte India

Under the current provisions, if an individual owns more than one house property, only one property is allowed to be considered as self-occupied property. The other house property, even though not let out, will be considered as deemed to be let out and notional rent is required to be offered for taxation. This was a pain point for individual taxpayers specially if their families were located at different locations and the house was not actually let out as they were still required to offer notional income to tax.

In order to help such individuals, the interim Budget proposes to allow two house properties being considered as self-occupied property. This is definitely a welcome move as the deemed rent is no longer considered taxable and is in line with global principles. However, this amendment is likely to result in an adverse impact from a taxation point in some situations where a loan has been taken on the second house.

Situation 1

Mr. A owns two house properties. Both these properties are currently self-occupied and there is no housing loan on the property. Under existing provisions, the individual will have tax liability on account of the second property being treated as deemed let out. The deemed rental income has been assumed to be INR 100,000 per year.

Particulars Property 1 (Self Occupied) Property 2 (Deemed Let out)
Net Annual Value (NAV) NIL 100,000
Less: Standard Deduction NA (30,000)
Less: Interest on housing loan NIL NIL
Income from house property NIL 70,000

With the proposed change, the individual can now consider two properties as self-occupied. As such, there will not be any income from house property in the above situation and consequently, there will not be any tax liability.

In Case of Housing Loan

In the same example, let us now assume that there is housing loan on both the properties. The interest payment has been assumed to be INR 300,000 and INR 400,000. Let’s now see impact of proposed changes in the Budget.

Under Existing Provisions

Particulars Property 1 (Self Occupied) Property 2 (Deemed Let out)
Net Annual Value NIL 100,000
Less: Standard Deduction NA (30,000)
Less: Interest on housing loan (300,000) (400,000)
Income from house property (200,000) (330,000)

Loss to be set-off in current year is INR 200,000 against salary/other income. Hence, loss which can be carried forward- INR 330,000 to be set off against future house property income.

Under Proposed Provisions

Particulars Property 1 (Self Occupied) Property 2 (Self occupied)
Net annual value NIL NIL
Less: Standard Deduction NA NA
Less: Interest on housing loan (300,000) (400,000)
Income from house property (200,000)

Carried forward loss is Nil. Hence, in this case, the individual has a negative tax impact on account of the amendment proposed. As such, the amendment would impact individuals depending on individual circumstances, quantum of interest and rent income.

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