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The Union Price range 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- Proceed with the outdated tax regime and hold taking tax deductions.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’ll be able to calculate tax legal responsibility beneath 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 Commonplace 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 gained’t get tax profit for the curiosity paid on a house mortgage beneath Part 24.
Sure, however not completely right.
You possibly can nonetheless take tax profit for curiosity fee on a house mortgage beneath 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. Not like different tax deductions, just a few sections of the Revenue 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 tips on how to calculate Revenue from Home Property. It specifies that the Revenue from Home Property for a self-occupied property is NIL and which you could have as much as 2 self-occupied properties. Lease (or the notional lease from the remaining properties (let-out or deemed let-out) might be added to the Revenue (from home property).
Annual Rental Revenue – Municipal Taxes = Internet Annual Worth (NAV)
Part 24 specifies the deductions which are allowed from Revenue from Home Property.
Two varieties of deductions permitted.
- Commonplace deduction (of 30% of the Internet Asset Worth). Be aware: This commonplace deduction is completely different from the Commonplace 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.
Revenue from Home Property = Internet Annual Worth – Commonplace 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 fee for a self-occupied property is Rs 2 lacs.
Revenue from Home Property = 0 – Rs 2 lacs (curiosity) = – Rs 2 lacs
That is your Loss beneath Revenue from Home property.
Part 71 permits for set-off of Loss beneath Revenue from Home Property towards different heads of Revenue. 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 beneath 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 fee 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:
- Disallows deduction of dwelling mortgage curiosity paid for a self-occupied property. That is laid out in Part 115BAC(2)(i)
- Disallows set-off of Loss Underneath Revenue 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 is just not allowed. Thus, in case you 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, your 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 beneath the brand new tax regime. You possibly can, however just for a let-out (or deemed let-out) property.
How is a Let-out property completely 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 could 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.
Revenue from home property = Rs 2.5 lacs – Rs 6 lacs = – Rs 3.5 lacs
Subsequently, the loss beneath Revenue 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 beneath Revenue 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 beneath revenue from home property = Rs 3.5 lacs (however Part 71 caps the set off at solely Rs 2 lacs)
Thus, your web taxable revenue = 15 – 2 = 13 lacs.
Be aware, 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 decreased your revenue by Rs 4.5 lacs. Fairly helpful.
Within the New Tax Regime
Right here too, loss beneath Revenue from Home Property = Rs 3.5 lacs
Nevertheless, the brand new tax regime doesn’t permit the set off of this loss towards every other head beneath Part 71.
Therefore, this loss goes waste however you may 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 should not have to pay tax on rental revenue.
Therefore, you pay tax on solely Rs 15 lacs. Taxable revenue decreased by Rs 2.5 lacs as a consequence 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 beneath Revenue from Home Property is just not 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.
Featured Picture Credit score: Unsplash
Disclosure/Disclaimer
I’m not a tax skilled. You might be suggested to seek the advice of a Chartered Accountant earlier than performing on the contents of this publish.
Supply/Further Hyperlinks
How cap of Rs 2 lacs beneath Revenue from Home Property impacts you?
This publish was first printed in February 2020 and has been up to date since.
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