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Interest deduction for home loans available in new tax regime only on rental property


Interest deduction for home loans available in new tax regime only on rental property

People who have on-going home loans should consider the fact that interest repaid on their loans helps them reduce their tax liabilities by way of deductions. Yet, under the new income tax system proposed by the Central Government, the interest repaid on home loans will not be deductible for taxes in case of self-occupied homes. Yet, for those taxpayers who have rented out their homes, there is some good news in store.

Interest that is repaid on a home loan taken for a property that has been rented out, can be claimed as a deduction on taxes under Section 24 (B). This will be possible even under the new taxation regime. Lower slab rates have been proposed by the 2020 Union Budget under the new tax regime however the catch is that there will be no exemptions or deductions in most cases. Taxpayers can optionally choose this new regime for FY2020-21 or they can retain their existing slab if they wish. Most tax deductions are not available in the new regime but interest repaid on home loans for properties that are rented out, will still be tax deductible.

Key things to know in this regard

If you have let out your property and are earning income from rentals, then you can claim deduction of the interest repaid on the home loan for this property, from the rental income that you are earning. Even in the new tax regime, those who are landlords, can get this tax deduction on interest repayment.

Landlords can claim standard deduction of 30% from net rental income and net rental income is the total rental income (higher of the expected rent/rent received or the receivable) in a particular financial year which is lower than the municipal taxes paid for that particular financial year. Post claiming standard deduction, landlords can deduct interest paid on home loans for the property which has been rented out. The final figure post deduction of interest repaid and standard deduction will be lowering the overall taxable income from house property and reduce the total liability of the individual in question.

The new tax regime will not enable deductions on home loan interest repaid for a property which is self-occupied. Yet, in the current tax regime, deduction of home loan interest repaid for a self-occupied house/property is allowed up to Rs. 2 lakh which helps in reducing the overall tax liability. The deduction of home loan interest is thus positively tilted towards landlords in the new regime.

Things to be careful about

In spite of the deduction being allowed for landlords in the new tax regime, there are a few things that you must look out for. Firstly, if the interest repaid on your home loan in a particular financial year surpasses the rental income that you have earned, then it will lead to a loss under the head of income from house property. This loss will not be set-off against any other income head like interest income, salary and capital gains under the new tax regime. Hence, you cannot lower the taxable income with this loss on the house property. Under the current regime, you can set off these losses from house property up to Rs. 2 lakh.

According to the Finance Bill, 2020, any losses resulting from letting out house property cannot be carried forward to the next financial years in the new regime. Yet, the Memorandum to the Finance Bill states that a taxpayer may carry forward losses from properties let out to the upcoming financial years. The Finance Bill, however will ultimately emerge triumphant over the Memorandum and hence losses may not be carried forward to subsequent financial years in the new regime. Watch out for this aspect by all means. If you have property that has been rented out, you can thus claim a standard deduction along with deduction for home loan interest repaid from the net rental income that you earn. Be wary in case of losses and in such situations, the previous tax regime may be more advantageous. Calculate your liabilities in both regimes and then opt for the one which gives you the highest savings.


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