The Income-tax Act, 1961 (Act) provides certain benefits to home buyers if they have taken a home loan for buying house property. These benefits are in the form of deductions from taxable income for interest paid on a home loan and repayment of the principal component. Such deductions help reduce the tax liability for the individual taxpayer, especially if he/she has opted for the old tax regime.
Though the Interim Budget 2024 is a ‘vote-on-account’ budget, homebuyers would be hopeful that certain relief measures are introduced to lower the tax burden. These could include:
- Increase in the limit of eligible deduction for interest paid on home loan to at least Rs 3 lakh as the same has not been changed since 2014, when it was enhanced from Rs 1.5 lakh to Rs 2 lakh. This deduction will benefit all homebuyers – whether their property is self-occupied or rented out.
- In case of house property given on rent or house property which is declared as ‘deemed to be let-out’, the government may remove the capping of Rs 2 lakh which is allowed to be set-off against salary (after adjustment with other rental income, if any) in the same year. This will provide much-needed relief to those who have given their houses on rent or those taxpayers who are paying taxes on notional rent on ‘deemed to be let-out’ house property even when there is no real income earned by them from such property.
How previous budgets changed rules for homebuyers
Interest paid on home loan is one of the most common deductions claimed by salaried taxpayers who have taken a home loan for their house property. Section 24(b) of the Act provides a maximum deduction of Rs 2 lakh for interest paid on a home loan in case of a self-occupied house property. This deduction can also be claimed for a house property that cannot be occupied by the individual due to his/ her employment, business or profession at any other place and such individual resides in a house which is not owned by him/ her.
Before 2019, an individual who had more than one self-occupied house property was allowed to declare only one house property as self-occupied and any other properties were considered ‘deemed to be let-out’ and notional rent at market value from such ‘deemed to be let-out’ properties was taxable in his/ her hands.
This resulted in hardships for middle-class taxpayers who were maintaining houses for their family at two different locations due to their job, children’s education, care of parents etc. The interim budget in February 2019 changed the laws to exempt taxation of notional rent on second house property provided it was actually occupied by the individual or his/her family. Thus, taxpayers could now declare two house properties as self-occupied if they were not given on rent and other conditions (such as property should not be lying empty) specified in the tax laws are satisfied. However, the overall combined deduction available to the taxpayer for interest paid on home loan was not changed (i.e., Rs. 2 lakh) even if the individual paid interest on home loans on both the house properties.
In case of a house property which is actually given on rent by the taxpayer, the rental income is taxable under the head ‘income from house property’ after subtracting the municipal taxes paid to local government authorities. Further, a standard deduction of 30% on the net amount and interest payable on home loan is subtracted to derive the taxable income in the hands of the taxpayer.
Income tax laws allow home loan interest paid during pre-construction period as a deduction in 5 equal instalments starting from the year of completion of construction. However, it may happen that the interest amount – eligible for deduction – exceeds the rental income earned from the house property thereby resulting in a loss under the head ‘income from house property’.
Such loss can be set-off by the taxpayer against other rental income that he/she may have and any balance loss can be set-off against salary income in the same year. Prior to 2017, the taxpayer was allowed to set-off such loss against salary without any limit in the same year. However, the Finance Act 2017 changed the provisions of section 71 of the Income-tax Act to restrict such set-off against salary to Rs 2 lakh and balance loss is allowed to be carried forward to 8 years and can be set-off against ‘income from house property’ only. This set-off restriction mainly impacts the taxpayers who are paying a higher amount of home loan interest for house property which is taxable as ‘deemed to be let-out’ without any real income.
Current income tax deductions available to home buyers in old, new tax regime
Some of the deductions available to a taxpayer for interest paid on home loan under the old tax regime (OTR) and new, concessional tax regime (CTR) are summarized below:
| Particulars | Self-occupied house property | Let-out house property (i.e. given on rent) | ||
| OTR | CTR | OTR | CTR | |
| Interest paid on home loan is allowed as a deduction from rental income | – | – | Yes | Yes |
| Maximum interest which can be set-off against rental income | – | – | No limit | No limit |
| Interest paid on home loan is allowed as set-off against salary | Yes | No | Yes | No |
| Maximum interest which can be set-off against salary (remaining after adjustment with rental income, if any) | Rs. 2,00,000 | NA | Rs. 2,00,000 | NA |
| Unadjusted interest can be carried forward to future years (i.e. loss from house property) | No | No | Yes | No |
| Additional deduction allowed under Section 80EEA* of the Act for home loan interest | Yes | No | Yes | No |
*Note: Section 80EEA of the Act provides additional deduction of maximum Rs 1.5 lakh for home loan interest to first time home buyers if conditions mentioned in the section are satisfied.
(The article is written by Shalini Jain, Tax Partner, People Advisory Services, EY India. Akshay Sharma, Senior Manager, EY India contributed to this article. Views expressed are personal.)
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