It will complicate matters for people who have outstanding loans on their second house.
The interim finance minister abolished income tax on notional rent from the second self-occupied house, benefiting those with two houses but no outstanding loan on the second one. “Since most people don’t have housing loans running on their self-occupied second house, this will benefit them. The main advantage of this move is operational – it does away with disputes regarding the computation of notional rent,” said Suresh Surana, founder, RSM India.
However, it will complicate matters for those with outstanding loans on their second house. “This is because the general taxation rule is that once an income source becomes tax-free, deduction available on expenses related to that also goes,” said Surana. People who are using housing loan interest on their second house for tax planning will take a hit because the maximum interest benefit allowed on both these houses will now be restricted to Rs 2 lakh. More importantly, the carry-forward of remaining housing loan interest (above Rs 2 lakh per annum) on the second self-occupied house will not be allowed now.
“Carry-forward benefit is available only for houses rented out or treated as rented with notional rent and not for self-occupied houses,” said Karan Batra, CEO, Chartered Club.
Capital gains benefit Section 54 of the Income Tax Act stipulates capital gains from residential real estate are exempt if used for buying another house. However, this is the case only when one house is bought, posing a problem to people who sold an ancestral home and split the proceeds among family members. To mitigate this problem, the interim budget proposed a two-way splitting or purchase of two houses. But this will be allowed only once in a lifetime and only in cases where the sale proceeds are below Rs 2 crore. There is no restriction, though, if only one house is bought.
“The Rs 2 crore restriction is applicable only to people who want to buy two houses using capital gains. For those who are buying only one house, there is no restriction,” said Batra.
