You may take Tax Profit for Residence Mortgage Curiosity even underneath the New Tax Regime however

The Union Finances 2023 made the brand new tax regime fairly engaging by decreasing tax charges.

So, you could have two choices.

1. Proceed with the previous tax regime and preserve 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 will likely be advantageous for salaried folks except they will declare tax deductions of Rs 4.25 lacs or extra. As a taxpayer, you’ll be able to 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 widespread deductions are disallowed. The one exceptions are Normal deduction and employer contribution to NPS, EPF, and superannuation fund.

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

Sure, however not solely appropriate.

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

We should perceive how this tax advantages truly works. In contrast to different tax deductions, a number of 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 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 lease from the remaining properties (let-out or deemed let-out) will likely 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 sorts of deductions permitted.

1. Normal deduction (of 30% of the Internet Asset Worth). Observe: This commonplace deduction is totally different from the Normal deduction of Rs 50,000 for salaried workers.
2. 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 = Internet Annual Worth – Normal Deduction (@30% of NAV) –Curiosity on Residence Mortgage

For a self-occupied property, the rental revenue is taken into account NIL (that is laid out in Part 23). Now, let’s say you pay dwelling 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 yr. This cover would come into image for let-out properties.

Subsequently, in case your wage is Rs 8 lacs, you’ll be able to set off loss underneath revenue from home property towards this wage. Your taxable revenue goes down from Rs 8 lacs to Rs 6 lacs.

That is how tax advantage of Rs 2 lacs for dwelling mortgage curiosity cost comes about.

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

Curiosity of Rs 1.5 lacs (self-occupied property): Taxable revenue = 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:

1. Disallows deduction of dwelling mortgage curiosity paid for a self-occupied property. That is laid out in Part 115BAC(2)(i)
2. 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 dwelling mortgage curiosity (24b) for a self-occupied property just isn’t allowed. Thus, you probably have one (or two) self-occupied properties and also you go for the brand new tax regime, you then will be unable to take any profit for dwelling mortgage curiosity. Thus, the complete dwelling mortgage curiosity paid for a self-occupied property goes waste from the tax-saving perspective.

Nevertheless, this doesn’t imply you’ll be able to’t take tax profit for dwelling mortgage curiosity underneath the brand new tax regime. You may, 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 revenue and residential mortgage curiosity are handled for self-occupied and let-out properties.

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

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 revenue (after municipal taxes and commonplace deduction) is Rs 2.5 lacs. Curiosity paid for dwelling 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 revenue (earlier than rental revenue) is Rs 15 lacs.

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

Thus, your internet taxable revenue = 15 – 2 = 13 lacs.

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

Thus, dwelling mortgage curiosity has diminished your revenue 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 enable the set off of this loss towards some other head underneath Part 71.

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

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

Due to curiosity, you wouldn’t have to pay tax on rental revenue.

Therefore, you pay tax on solely Rs 15 lacs. Taxable revenue diminished by Rs 2.5 lacs as a result of dwelling mortgage curiosity. Or the tax advantage of Rs 2.5 lacs for dwelling mortgage curiosity paid. Underneath the New Tax Regime.

Underneath the brand new tax regime, set-off of loss underneath Earnings from Home Property just isn’t allowed. Nevertheless, you’ll be able to nonetheless use it to nullify rental revenue from a let-out property. And that’s your tax profit.

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Disclosure/Disclaimer

I’m not a tax professional. You’re suggested to seek the advice of a Chartered Accountant earlier than appearing on the contents of this submit.

Supply/Further Hyperlinks

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

Earnings Tax Web site

Finance Invoice, 2023

Finances Memorandum

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