The 2019-20 Interim Union Budget contained several interesting measures that promise to bring major relief to citizens. The Union Budget has announced a proposal for exemption of taxation on notional rent assumption from a second home that is self-occupied. The Minister Piyush Goyal has already stated income tax is payable on notional rent in case a person has more than one home which is self-occupied. However, he also added that the middle classes usually face difficulties in maintaining households at different locations due to professional purposes, education of children, taking care of parents and so on. As a result, the income tax levy has been proposed on notional rent assumption on a second home that is self-occupied.
According to this particular proposal, the second home will be perceived as self-occupied property in case it has not been rented out. Based on the present legal framework, second homes which are vacant or used by other family members are usually considered as rented out and taxes are payable on this notional rent that has been earned from the property in question. Yet, industry experts do not have the full picture relating to the implementation of the proposal contained in the latest budget and also on the taxation impact of the same. However, while self-occupied property benefits have been scaled up to cover second homes, the maximum deduction that can be claimed on home loan interest has also been restricted in turn.
As per experts, from the financial year 2019-20, the deduction on interest paid on a home loan for both self-occupied homes will be capped at Rs. 2 lakh. Earlier, those with second homes could easily claim tax deductions on interest paid on their home loans without any cap. Yet, total losses from home property were earlier set off at Rs. 2 lakh for a particular financial year. Any loss not possible to be claimed in the current financial year was eligible to be taken forward for 8 consecutive assessment years and set-off against the future income of the person. This may no longer be valid since after the Budget 2019, both houses owned by a person will be perceived as self-occupied.
There is now a major question that whether a citizen’s second home will be perceived as self-occupied or it can be taken as deemed to be let out based on whether specific self-occupied terms and conditions are being met. Some experts feel that a second home can still be considered as rented/let out in case it does not meet conditions under Section 23 (2) of the Income Tax Act. This section states that the home value will be perceived as nil in case the owner uses said property for his/her residential requirements. It cannot be occupied by the owner for purposes like business/profession/employment. The second home will be taken as let out in case the conditions under this section are not fully met.
Other experts also feel that relief will be given to those citizens who previously had to pay up taxes on second homes which were used by parents earlier or are simply vacant at the moment. They will now be able to avoid paying taxes on these properties in case they are eligible under the conditions for self-occupied homes. Also, the home loan interest cap of Rs. 2 lakh will now cover both self-occupied homes. A few other experts feel that in case a citizen has more than one home, then the notional rent provisions will be applicable even on the vacant home or the home that is resided in by parents.
The notional rent provision will no longer be there yet, the second home must be used as a residence. The authorities are expected to issue further clarifications on this matter since there is a predominant query pertaining to a scenario where both the homes should be used as residences to claim these tax benefits or even when a person uses a single home as the residence and another remains empty. Will the tax deduction apply in this case? This may be an area of slight confusion that should be addressed by the authorities soon. Individuals will have to take their vacant homes as self-occupied now from FY2019-20 and tax will not have to be paid on the notional rent assumption any longer which is the key take-away for homeowners. However, the tax restriction on home loan interest to cover both self-occupied homes could be a slight deterrent to investors since they will get lower tax benefits overall.