In a move that is likely to hurt investor-led demand in the real estate sector, the finance minister in the Budget 2017-18 tweaked the provision that significantly restricts the tax benefit a home-owner can claim against the interest outgo on a property put on rent.
While the current provisions allow a home owner to claim full deduction on the interest paid in case the property has been let-out, the finance minister proposed to limit the deduction to Rs 2 lakh in line with what the homeowner can claim in case of a self-occupied property.
According to the Annexure to the Budget speech 2017-18, “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 two lakhs. The loss not so set off would be allowed to be carried forward for set off against house property income for eight assessment years.”
This essentially means that for a property put on rent, an individual can now claim deduction on only up to Rs 2 lakh as against on the full interest component of home loan in a year. Illustratively, if the annual interest component in the EMI is Rs 5 lakh, the home-owner could earlier claim deduction on full Rs 5 lakh on such property, but now can only claim up to Rs 2 lakh in a year (carry forward allowed for 8 years).
Now the government has removed the differentiation and the deduction benefit stands capped at Rs 2 lakh both in case of a self occupied property or a property put on rent.
“The Finance Bill, 2017 proposes to restrict such set off of house property loss to Rs 2,00000 per annum only. Balance loss if any will be carried forward to be set off against house property income of subsequent 8 years. Hence individual tax payers having loss of more than Rs 2,00,000 will now have a higher tax outgo,” said KPMG partner Parizad Sirwalla.
While several real estate players have expressed their concern, Getamber Anand, president Credai and CMD, ATS Infrastructure said, “The move is being taken negatively by the industry, however, there is some relief on offer. The government has reduced the holding period for qualifying for long term capital gains tax from three years to two years and so investors can now sell the property after a holding period of two years without paying much tax.”
Experts say that this will significantly impact the investment led demand in the real estate sector and may result into further softening of residential real estate prices.
“It was a routine practice among real estate investors to buy a property and claim such deduction benefits. The move by the government would help reduce such investment demand and also bring down the prices which may benefit the real home buyer,” said Surya Bhatia, founder, Asset Managers Wealth Managers.
Even HDFC Asset Management, in a report said, “Rs 2 lakh cap on claiming loss from investment property (2nd or subsequent house) vs. unlimited loss allowed earlier (though carry forward allowed for 8 years) may impact investor-led demand.”
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