The Union Funds 2023 made the brand new tax regime fairly engaging by lowering tax charges.

So, you have got two choices.

1. Proceed with the previous tax regime and hold taking tax deductions. OR
2. Go for the brand new tax regime (decrease taxes) however don’t take tax deductions

We noticed that the New Tax Regime might be advantageous for salaried folks until they will declare tax deductions of Rs 4.25 lacs or extra. As a taxpayer, you may calculate tax legal responsibility underneath each the regimes and go for the one with a decrease tax legal responsibility.

Beneath the brand new tax regime, all of the widespread deductions are disallowed. The one exceptions are Commonplace deduction and employer contribution to NPS, EPF, and superannuation fund.

There may be an impression that, if you happen to go for the brand new tax regime, you gained’t get tax profit for the curiosity paid on a house mortgage underneath Part 24.

Sure, however not totally right.

You’ll be able to nonetheless take tax profit for curiosity fee on a house mortgage underneath the New Regime. However just for a let-out property. Not for a self-occupied property.

How? Let’s discover out.

Part 24: How Tax Profit for Dwelling Mortgage Curiosity works?

You get tax advantage of Rs 2 lacs for curiosity paid for a housing mortgage. That’s proper.

We should perceive how this tax advantages really works. Not like different tax deductions, a couple of sections of the Earnings Tax Act come collectively to offer you this tax profit.  Part 23, Part 24, Part 71 and Part 71(B) for carry ahead.

Part 23 specifies the way to calculate Earnings from Home Property. It specifies that the Earnings from Home Property for a self-occupied property is NIL and that you may have as much as 2 self-occupied properties. Hire (or the notional hire from the remaining properties (let-out or deemed let-out) might be added to the Earnings (from home property).

Annual Rental Earnings – Municipal Taxes = Internet Annual Worth (NAV)

Part 24 specifies the deductions which might be allowed from Earnings from Home Property.

Two forms of deductions permitted.

1. Commonplace deduction (of 30% of the Internet Asset Worth). Observe: This commonplace deduction is completely different from the Commonplace deduction of Rs 50,000 for salaried staff.
2. Dwelling Mortgage Curiosity

As well as, Part 24 caps the deduction for cumulative curiosity paid on all of the self-occupied properties to Rs 2 lacs. Part 24 locations no such cap for let-out or deemed let-out property.

Earnings from Home Property = Internet Annual Worth – Commonplace Deduction (@30% of NAV) –Curiosity on Dwelling Mortgage

For a self-occupied property, the rental earnings is taken into account NIL (that is laid out in Part 23). Now, let’s say you pay house mortgage curiosity of Rs 2.5 lacs. The utmost deduction for curiosity fee for a self-occupied property is Rs 2 lacs.

Earnings from Home Property = 0 – Rs 2 lacs (curiosity) = – Rs 2 lacs

That is your Loss underneath Earnings from Home property.

Part 71 permits for set-off of Loss underneath Earnings from Home Property towards different heads of Earnings. Caps such set off at Rs 2 lacs per monetary 12 months. This cover would come into image for let-out properties.

Subsequently, in case your wage is Rs 8 lacs, you may set off loss underneath earnings from home property towards this wage. Your taxable earnings goes down from Rs 8 lacs to Rs 6 lacs.

That is how tax advantage of Rs 2 lacs for house mortgage curiosity fee comes about.

Should you had paid Rs 2.5 lacs in house mortgage curiosity for self-occupied property, Part 24 would cap the deduction at solely Rs 2 lacs Therefore, taxable earnings = Rs 8 lacs – Rs 2 lacs = Rs 6 lacs.

Curiosity of Rs 1.5 lacs (self-occupied property): Taxable earnings = Rs 8 lacs – 1.5 lacs = Rs 6.5 lacs

What modifications within the New Tax Regime?

The brand new tax regime does the next:

1. Disallows deduction of house mortgage curiosity paid for a self-occupied property. That is laid out in Part 115BAC(2)(i)
2. Disallows set-off of Loss Beneath Earnings from Home Property. That is laid out in Part 115BAC(2)(ii)(b)

Beneath the brand new tax regime, the tax deduction for house mortgage curiosity (24b) for a self-occupied property is just not allowed. Thus, when you’ve got one (or two) self-occupied properties and also you go for the brand new tax regime, then you definitely won’t be able to take any profit for house mortgage curiosity. Thus, the whole house mortgage curiosity paid for a self-occupied property goes waste from the tax-saving perspective.

Nonetheless, this doesn’t imply you may’t take tax profit for house mortgage curiosity underneath the brand new tax regime. You’ll be able to, however just for a let-out (or deemed let-out) property.

Learn: Hire vs Purchase: Hire you pay to the Home proprietor vs. Hire you pay to the Financial institution

How is a Let-out property completely different?

There are some variations in how annual earnings and residential mortgage curiosity are handled for self-occupied and let-out properties.

Firstly, a let-out property can have some rental earnings.

Secondly, for a let-out property, Part 24 doesn’t put any cap on the curiosity deduction that you may take. For a self-occupied property, the cap is Rs 2 lacs. The brand new tax regime does NOT disallow curiosity deduction for a let-out property.

Let’s say your rental earnings (after municipal taxes and commonplace deduction) is Rs 2.5 lacs. Curiosity paid for house loans on these properties is Rs 6 lacs.

Earnings from home property = Rs 2.5 lacs – Rs 6 lacs = – Rs 3.5 lacs

Subsequently, the loss underneath Earnings from Home Property turns into Rs 3.5 lacs.

Part 71 places a further restriction (not mentioned earlier). It caps the set-off of Loss underneath Earnings from Home Property to Rs 2 lacs.

Within the Previous Tax Regime

Let’s say your taxable earnings (earlier than rental earnings) is Rs 15 lacs.

Loss underneath earnings from home property = Rs 3.5 lacs (however Part 71 caps the set off at solely Rs 2 lacs)

Thus, your web taxable earnings = 15 – 2 = 13 lacs.

Observe, in absence of house mortgage curiosity, your taxable earnings would have been Rs 15 lacs + Rs 2.5 lacs (from home property) = Rs 17.5 lacs.

Thus, house mortgage curiosity has diminished your earnings by Rs 4.5 lacs. Fairly helpful.

Within the New Tax Regime

Right here too, loss underneath Earnings from Home Property = Rs 3.5 lacs

Nonetheless, the brand new tax regime doesn’t enable the set off of this loss towards every other head underneath Part 71.

Therefore, this loss goes waste however you have got nonetheless been in a position to keep away from paying tax on rental earnings.

In absence of house mortgage curiosity, you’d have paid tax on taxable earnings of Rs 15 lacs + Rs 2.5 lacs (rental earnings) = Rs 17.5 lacs.

Due to curiosity, you shouldn’t have to pay tax on rental earnings.

Therefore, you pay tax on solely Rs 15 lacs. Taxable earnings diminished by Rs 2.5 lacs on account of house mortgage curiosity. Or the tax advantage of Rs 2.5 lacs for house mortgage curiosity paid. Beneath the New Tax Regime.

Beneath the brand new tax regime, set-off of loss underneath Earnings from Home Property is just not allowed. Nonetheless, you may nonetheless use it to nullify rental earnings from a let-out property. And that’s your tax profit.

Featured Picture Credit score: Unsplash

Here’s a Twitter Thread on this matter.

Disclosure/Disclaimer

I’m not a tax skilled. You’re suggested to seek the advice of a Chartered Accountant earlier than performing on the contents of this put up.

Supply/Further Hyperlinks

How cap of Rs 2 lacs underneath Earnings from Home Property impacts you?

Earnings Tax Web site

Finance Invoice, 2023

Funds Memorandum

This put up was first printed in February 2020 and has been up to date since.