The Finance Minister Arun Jaitley, has made a proposal to restrict the tax benefit on loan repayment of a second house. You can claim a deduction only up to INR 2 Lakhs a year, after adjusting rental income. This is bad news for the real estate sector, especially the luxury housing segment, which was badly hit after demonetization.
Why has the Finance Minister made this bold move? Simple…To discourage speculative activity in real estate. Investors buy second houses not to collect rent, but for capital appreciation. Houses and apartments are availed on home loan by investors, locked up (not given on rent) and sold for a very high price after a few years. This encourages speculation, pushing the prices of homes, beyond the reach of the common man. You and the middle class would not be able to afford a house/apartment in a metro city. After this move, expect prices of apartments to reduce in major cities.
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Earlier, if you rented out your house/property, you could deduct the entire interest you paid on the home loan, after adjusting the rental income. Now after the Budget, the Government has reduced tax benefits on houses/properties, let out on rent.
After Union Budget 2017, the tax benefits on renting your second home, would be restricted to a maximum of INR 2 Lakhs a year. However, any balance loss can be carried forward and set off against the income you earn from subsequent 8 years.
You have availed a home loan of INR 55 Lakhs from a bank and purchased a second house. The bank charges you an interest of 9.5% on the home loan, with tenure of 20 years. You pay an EMI of INR 51,270. You rent this house and earn INR 20,000 a month.
Your EMI = INR 51, 270. EMI = EMI (Principal) + EMI (Interest)
Your EMI (Interest) for the first year is INR 5.2 Lakhs. You can take a look at IndianMoney.com home loan calculator at
Earlier, if you rented out your house/property, you could deduct the entire interest you paid on the home loan, after adjusting the rental income.
Your EMI (Interest) for the first year is INR 5.2 Lakhs. The rent you earn is INR 20,000 a month or INR 2.4 Lakhs a year. You deduct the rent you pay from the EMI (Interest) on the home loan
= INR 5.2 Lakhs – INR 2.4 Lakhs = INR 2.8 Lakhs.
If your taxable salary is say INR 7.5 Lakhs after tax deductions and exemptions, you can deduct a further INR 2.8 Lakhs. Your taxable salary comes down to INR 4.7 Lakhs. You fall in the tax bracket of INR 2.5 Lakhs to INR 5 Lakhs and pay tax at 5%.
You can claim a deduction on interest paid on home loan only up to INR 2 Lakhs a year, after adjusting rental income. You can deduct only INR 2 Lakhs on your taxable salary of INR 7.5 Lakhs. Your taxable salary is now INR 5.5 Lakhs. You fall in the tax bracket of INR 5 Lakhs to INR 10 Lakhs and pay tax at 20%. After this new rule you are paying more money in tax.
Yes, if you let out your second house, you will not be getting the same tax benefits you enjoyed earlier. But, speculative activity would come down in real estate. This would reduce prices of houses and apartments in cities making them more affordable. You’re still a winner.
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