The Union Price range 2023 made the brand new tax regime fairly engaging by lowering tax charges.
So, you could have two choices.
- Proceed with the previous tax regime and preserve 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 shall 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 beneath each the regimes and go for the one with a decrease tax legal responsibility.
Beneath the brand new tax regime, all of the frequent deductions are disallowed. The one exceptions are Customary 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 appropriate.
You’ll be able to nonetheless take tax profit for curiosity cost 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 Dwelling 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 really works. In contrast to different tax deductions, just a few sections of the Earnings 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 the right way to calculate Earnings from Home Property. It specifies that the Earnings from Home Property for a self-occupied property is NIL and 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) shall be added to the Earnings (from home property).
Annual Rental Earnings – Municipal Taxes = Web Annual Worth (NAV)
Part 24 specifies the deductions which might be allowed from Earnings from Home Property.
Two varieties of deductions permitted.
- Customary deduction (of 30% of the Web Asset Worth). Word: This customary deduction is completely different from the Customary deduction of Rs 50,000 for salaried staff.
- Dwelling 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 – Customary Deduction (@30% of NAV) –Curiosity on Dwelling 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 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 beneath Earnings from Home property.
Part 71 permits for set-off of Loss beneath 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.
Due to this fact, in case your wage is Rs 8 lacs, you may set off loss beneath earnings from home property towards this wage. Your taxable earnings 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.
When 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 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 modifications 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 Beneath Earnings from Home Property. That is laid out in Part 115BAC(2)(ii)(b)
Beneath the brand new tax regime, the tax deduction for dwelling mortgage curiosity (24b) for a self-occupied property shouldn’t 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 dwelling mortgage curiosity. Thus, all the dwelling 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 dwelling mortgage curiosity beneath the brand new tax regime. You’ll be able to, 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 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 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 earnings (after municipal taxes and customary 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
Due to this fact, the loss beneath 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 beneath Earnings from Home Property to Rs 2 lacs.
Within the Previous Tax Regime
Let’s say your taxable earnings (earlier than rental earnings) is Rs 15 lacs.
Loss beneath earnings from home property = Rs 3.5 lacs (however Part 71 caps the set off at solely Rs 2 lacs)
Thus, your web taxable earnings = 15 – 2 = 13 lacs.
Word, in absence of dwelling mortgage curiosity, your taxable earnings would have been Rs 15 lacs + Rs 2.5 lacs (from home property) = Rs 17.5 lacs.
Thus, dwelling mortgage curiosity has decreased your earnings by Rs 4.5 lacs. Fairly helpful.
Within the New Tax Regime
Right here too, loss beneath Earnings 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 could have nonetheless been capable of keep away from paying tax on rental earnings.
In absence of dwelling 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 decreased 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. Beneath the New Tax Regime.
Beneath the brand new tax regime, set-off of loss beneath Earnings from Home Property shouldn’t 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 professional. You’re suggested to seek the advice of a Chartered Accountant earlier than performing on the contents of this submit.
Supply/Further Hyperlinks
How cap of Rs 2 lacs beneath Earnings from Home Property impacts you?
This submit was first revealed in February 2020 and has been up to date since.