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You can claim tax benefits on home loan interest for a rented out house

LiveMint logoLiveMint 27-02-2017 Parizad Sirwalla

I have just finished paying off the home loan on my first house and am planning to buy another house, which will be let out for rent. Will I get tax benefit on the loan paid on the second house? 

—Rahul Srivastava

We have assumed that the first house is considered a self-occupied property (SOP) and you have been availing the deduction towards interest on housing loan up to Rs2 lakh per financial year (FY). Further, we understand that the second house property would be considered as let out property (LOP). In case of LOP, the entire interest paid on the housing loan can be claimed against the taxable rental value, which is determined by factoring in specified deductions such as municipal taxes and standard deduction of 30% of the net rental value (i.e., gross rent minus municipal taxes). If you propose to buy an under-construction property, the pre-construction interest can also be availed as deduction. The deduction towards pre-construction interest per financial year should be restricted to one-fifth, commencing from the fiscal in which the possession of the house property is acquired.

Also, you can claim deduction in respect of repayment of principal portion of home loan, subject to cap of Rs1.5 lakh per annum (under section 80C of the Income-tax Act 1961).

Just for your information, the Finance Bill 2017 (effective for FY2017-18), proposes that the house property loss incurred in an FY (which could earlier be entirely set off against any other income earned during the same FY) has been capped at Rs2 lakh per FY. So, one can set off aggregate loss of up to Rs2 lakh incurred from all the house properties (after considering the deduction towards interest on housing loan as aforesaid) against any other income, if any, earned during the same FY. The balance unadjusted house property loss incurred during the FY can be carried forward for set off against house property income for up to 8 FYs.

This amendment is yet to receive the President’s assent. 

I have just turned 18, and would like to start investing with my pocket money and gift money, which are about Rs5,000 a month. Will the returns be taxed in my hands? 

—Aanya Seth

Since you are a major (older than 18 years of age), any income from investment of money (received as gift or pocket money) shall be taxable in your hands, depending on the nature and quantum of your investment income. 

My father sold his house to me in August 2013. I sold it in December 2016; will I be liable to pay LTCG or STCG? 

—Praveen Singh

As the house property has been held by you for more than 36 months from date of acquisition (i.e., April 2012), any gains resulting from sale of house property shall be termed as long-term capital gains (LTCG) and shall be taxable in your hands. LTCG shall be computed as the difference between net sale proceeds and the indexed cost of acquisition and improvement. The cost of acquisition and improvement, if any, incurred by you, subsequent to purchase should be indexed or inflated as prescribed. You can avail an exemption from LTCG tax by reinvesting the gains in a new residential property located in India, within the prescribed time limits (section 54). Alternatively, you can invest the LTCG in notified bonds within 6 months from the sale date, subject to a threshold of Rs50 lakh (section 54EC).

Just for your information, if the sale proceed receivable from sale of the house is less than the value adopted for payment of stamp duty, then for computing the capital gains, the value as assessed for the purpose of payment of stamp duty shall be considered as the sale value. 

Accordingly, the balance LTCG, if any, considering the aforesaid re-investment avenue, shall be taxed at flat 20%. Also, surcharge at 15% (if applicable) and education cess at 3% should be levied on such tax liability. If the sale consideration exceeds Rs50 lakh, appropriate tax will have to be deducted and deposited by you from the payments made to the buyer, assuming both of you are tax residents of India (section 194-IA). 

Parizad Sirwalla is partner (tax), KPMG

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