The Union Finances 2023 made the brand new tax regime fairly enticing by lowering tax charges.
So, you may have two choices.
- Proceed with the outdated tax regime and maintain taking tax deductions. OR
- 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 individuals except they’ll 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.
Underneath the brand new tax regime, all of the frequent deductions are disallowed. The one exceptions are Normal deduction and employer contribution to NPS, EPF, and superannuation fund.
There may be an impression that, in the event you 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 cost 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 Residence Mortgage Curiosity works?
You get tax good thing about Rs 2 lacs for curiosity paid for a housing mortgage. That’s proper.
We should perceive how this tax advantages really works. In contrast to different tax deductions, just a few sections of the Earnings Tax Act come collectively to provide you this tax profit. Part 23, Part 24, Part 71 and Part 71(B) for carry ahead.
Part 23 specifies the best way to calculate Earnings from Home Property. It specifies that the Earnings from Home Property for a self-occupied property is NIL and which you can 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 = Web Annual Worth (NAV)
Part 24 specifies the deductions which are allowed from Earnings from Home Property.
Two kinds of deductions permitted.
- Normal deduction (of 30% of the Web Asset Worth). Be aware: This customary deduction is totally different from the Normal deduction of Rs 50,000 for salaried workers.
- Residence 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 = Web Annual Worth – Normal Deduction (@30% of NAV) –Curiosity on Residence 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 residence mortgage curiosity of Rs 2.5 lacs. The utmost deduction for curiosity cost 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 good thing about Rs 2 lacs for residence mortgage curiosity cost comes about.
When you had paid Rs 2.5 lacs in residence 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 adjustments within the New Tax Regime?
The brand new tax regime does the next:
- Disallows deduction of residence mortgage curiosity paid for a self-occupied property. That is laid out in Part 115BAC(2)(i)
- Disallows set-off of Loss Underneath Earnings from Home Property. That is laid out in Part 115BAC(2)(ii)(b)
Underneath the brand new tax regime, the tax deduction for residence mortgage curiosity (24b) for a self-occupied property will not be allowed. Thus, if in case you have one (or two) self-occupied properties and also you go for the brand new tax regime, then you definately will be unable to take any profit for residence mortgage curiosity. Thus, your complete residence mortgage curiosity paid for a self-occupied property goes waste from the tax-saving perspective.
Nevertheless, this doesn’t imply you may’t take tax profit for residence 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 totally 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 which you can 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 customary deduction) is Rs 2.5 lacs. Curiosity paid for residence 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 an extra restriction (not mentioned earlier). It caps the set-off of Loss underneath Earnings from Home Property to Rs 2 lacs.
Within the Outdated 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 internet taxable earnings = 15 – 2 = 13 lacs.
Be aware, in absence of residence mortgage curiosity, your taxable earnings would have been Rs 15 lacs + Rs 2.5 lacs (from home property) = Rs 17.5 lacs.
Thus, residence mortgage curiosity has lowered 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
Nevertheless, the brand new tax regime doesn’t permit the set off of this loss towards another head underneath Part 71.
Therefore, this loss goes waste however you may have nonetheless been capable of keep away from paying tax on rental earnings.
In absence of residence 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 lowered by Rs 2.5 lacs resulting from residence mortgage curiosity. Or the tax good thing about Rs 2.5 lacs for residence mortgage curiosity paid. Underneath the New Tax Regime.
Underneath the brand new tax regime, set-off of loss underneath Earnings from Home Property will not be allowed. Nevertheless, you may nonetheless use it to nullify rental earnings from a let-out property. And that’s your tax profit.
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Disclosure/Disclaimer
I’m not a tax skilled. You’re suggested to seek the advice of a Chartered Accountant earlier than appearing on the contents of this publish.
Supply/Further Hyperlinks
How cap of Rs 2 lacs underneath Earnings from Home Property impacts you?
This publish was first printed in February 2020 and has been up to date since.