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Setting off loss from house property against salary income

In the budget for FY 2017-18, the Government of India introduced a proposal which reduces the extent to which loss from house property can be set off against other income including salary income. There seems to be confusion in the minds of some people as to how this proposal limits the tax benefit. The fact that some popular online publications have published incorrect information about this proposal has not helped the cause. This blog post attempts to throw some light on what the government proposed in the Finance Bill and how some have misunderstood the proposal.

Setting off loss from house property (prior to FY 2017-18)

In case of loss from house property, an employee could set off the same against his salary income without any limit. This was the rule prior to FY 2017-18. For example, if an employee’s loss from house property was Rs 6 lakh and his salary income was Rs 20 lakh, the employee needed to pay tax only on a salary of Rs 14 lakh (Rs 20 lakh minus the loss of Rs 6 lakh on house property).

The algorithm for setting off loss from house property against salary income is as follows.

Step 1: Calculate the annual value of the property (Section 23 of the Income Tax Act).

In case of self-occupied property: Rs 0.

In case of let-out property: Actual rent received/deemed rental value (as the case may be).

Step 2: Calculate the deductions (Section 24 of the Income Tax Act).

In case of self-occupied property: Actual interest payable or Rs 2 lakh, whichever is lower.

In case of let-out property: Actual interest payable (without any limit) plus other deductions such as municipal taxes paid.

Step 3: Calculate the loss from house property.

For each property, if the total deduction is more than the total annual value, there is a loss on the house property. Add up the profit/loss across properties and check if there is an aggregate loss on house properties.

Step 4: Set off loss under “Income from House Property” against the salary income (Section 71 of the Income Act).

In the event of an aggregate loss from house properties, set it off against the salary income. This reduces the taxable salary income. Please note that the set-off is available without any restriction. For example, if the loss from house property is Rs 8 lakh and the income from salary is Rs 8 lakh, the total taxable salary after set-off is Rs 0.

To be clear, Section 71 of the Income Tax Act talks about setting off loss from house property against other heads of income (not just salary income). We refer to setting off against salary income since this blog focuses primarily on salary taxation.

What does the Finance Bill 2017 change?

The Finance Bill 2017 does not restrict any of the deductions specified under Section 24 of the Income Tax Act. The Finance Bill simply restricts the extent of loss from house property which can be set-off against the salary income in a year, by way of an amendment to Section 71 of the Income Tax Act.

Following sub-section (3A) shall be inserted after sub-section (3) of section 71 by the Finance Act, 2017, w.e.f. 1-4-2018 :
(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.

In other words, irrespective of the amount of loss from house property, the set-off shall be restricted to a maximum of Rs 2 lakh in a year. For example, if the loss from house property is Rs 8 lakh in FY 2017-18 and the income from salary is Rs 8 lakh, the loss from house property that can be used for set-off shall be restricted to Rs 2 lakh and the total taxable salary after set-off shall be Rs 6 lakh. This move will negatively impact employees with high salary who pay housing loan interest on multiple house properties. The reduction in tax benefit could be significant for some of the employees.

We reiterate that the Finance Bill does not restrict the deduction but only restricts the set-off. This distinction is important because the loss from house property, to the extent not set-off, can be carried forward for eight years immediately succeeding the year in which the loss is incurred and the loss can be adjusted against income chargeable to tax under the head “Income from house property” in subsequent years.

The impact of the set-off restriction could be such that in certain cases the loss from house property may not be fully adjusted even in the subsequent years. In other words, some of the loss under Income from House property may never be fully utilized for the purpose of tax reduction.

Incorrect media reporting

We find, somewhat surprisingly, many respected publications having incorrectly reported on this issue. Let us take a look at some of the incorrect reporting.

“Budget restricts tax benefit on second house to Rs 2 lakh,” reads a headline. This is incorrect since the Finance Bill makes no reference to the “second house.” The article pertaining to the headline gives one an impression that the benefit from let-out property shall be the same as that from a self-occupied property (Rs 2 lakh). This can be misunderstood as benefit (of Rs 2 lakh) from let-out property being available in addition to the benefit from self-occupied property (Rs 2 lakh). The fact is the total benefit (considering both self-occupied and let-out property) is restricted to Rs 2 lakh.

“Union budget 2017: Tax benefit on second house restricted to Rs 2 lakh,” reads another headline. The fact is that the benefit even from the first house (irrespective of whether it is self-occupied or let-out) is restricted to Rs 2 lakh.

We have also come across an instance where the tax calculator utility on the website of a leading tax-return service provider handles the set-off incorrectly and consequently making incorrect tax calculation for FY 2017-18. The calculator restricts the deduction on house property to Rs 2 lakh instead of restricting the set-off on account of loss from house property to Rs 2 lakh.

Please exercise caution while handling loss from house property declared by your employees for calculating salary TDS for FY 2017-18.

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Leave a Comment (33) ↓

33 Comments

  1. Pradeep Gupta April 10, 2017

    Hi,

    I do agree that some media and experts have grossly misinterpreted it. Good analysis.

    Regards,
    Pradeep

    reply
  2. Puneet Singh April 25, 2017

    Hi,

    So, if I have multiple let out properties on my name. I can set-off 2L for each property from Tax calucation ?

    reply
    • gautham April 27, 2017

      No, the total set-off benefit (across all house properties) is restricted to Rs 2 lakh.

      reply
  3. PARAS AGGARWAL July 7, 2017

    CERTAINLY CORRECT ANAYLSIS

    reply
  4. Raghu July 30, 2017

    Suppose, I rent out a house and as the tenant is refusing to pay the rent, I am suffering a loss of 1,44,000 per year. Currently, it is under litigation, so no rent is received by me.. In this case, how do I fill-in the ITR-1 – Can I show this as loss. Please clarify Thanks

    reply
    • gautham July 31, 2017

      While I do not know the nature of the litigation, you may have to declare a “deemed” rent on the basis of an annual rental value and calculate your tax liability.

      reply
  5. Saroj Panda July 31, 2017

    I have one Self-occupied property and one was under construction during FY 2016-17. I have paid EMI for the property from Aug 2016 till date and it will continue.
    The interest paid on my 1st house property is around 1 lakh and on the 2nd property is close to 2.5 lakhs.
    Can I combine both the losses to max 2 lakh?
    Also, I have not declared my 2nd property loss to my Employer so it’s not included in Form 16. If I can cap the loss to 2 lakh, do I need to submit any other relevant form explaining the loss from the 2nd property?

    Thanks,
    Saroj

    reply
    • gautham July 31, 2017

      You cannot consider the loan pertaining to property under construction for tax benefit. You have to leave it out.

      reply
      • Vishal July 7, 2018

        I am in the same situation with a minor difference. I got the possession in Dec 2017
        1. 1st property self owned and in possession since 2013, paying EMI interest of about Rs 1.2 lac per year since 2013 and claiming in Section 24 in ITR since then.
        2. 2nd under construction property paying pre-EMI interest of about Rs.3 lac per year since Oct 2014 to Dec 2017. Construction completed and got possession in Dec 2017 and EMI started in Jan 2018. Let out in May 2018.

        For FY 2017-2018
        1. Am I entitled to only 2 lac combined interest deduction from 1st property and 2nd property ?
        2. Am I entitled to only 1.2 lac under Section 24 from 1st property and 2nd property interest as “loss” and adjust against my salaried income under Section 71?
        3. Can I claim the pre-emi of about 9 lac paid on 2nd property from Oct 2014 to Dec 2017? I read it can be used in 5 installments but not sure which section to use it under.

        For FY 2018-2019
        What to keep in mind for 2nd property in FY 2018-2019?

        Please help

        reply
        • gautham July 9, 2018

          1. Am I entitled to only 2 lac combined interest deduction from 1st property and 2nd property ?

          Ans: Yes, Rs 2 lakh is the maximum loss on house property (on account of the total interest deduction) which can be set-off against salary income.

          2. Am I entitled to only 1.2 lac under Section 24 from 1st property and 2nd property interest as “loss” and adjust against my salaried income under Section 71?

          Ans: Rs 2 lakh is the maximum loss that can be set-off. There is nothing in law which determines the limit on individual properties.

          3. Can I claim the pre-emi of about 9 lac paid on 2nd property from Oct 2014 to Dec 2017? I read it can be used in 5 installments but not sure which section to use it under.

          Ans: Should be claimed under section 24 along with the interest payable for that year.

          reply
  6. Pankaj September 11, 2017

    Different news paper may report differently but the bottom line is maximum set off under loss from property is limited to 2 LAcs in a year and a sure shot negative for ppl buying /investing in house with borrowed capital. Can the accrued loss be set off against capital gains while selling of the property?

    reply
  7. Thiruvengadam January 9, 2018

    I am declaring income from house property as say 5 lakhs , then can i set off the actual amount say 3 lakhs against his income.

    reply
    • gautham January 9, 2018

      What do you mean by “actual amount”?

      reply
  8. Thiruvengadam January 10, 2018

    salary income is 8 lakhs and income from house property rental income is 6 lakhs. Interest paid on my home loan is 4 lakhs. can i set off 2 lakhs against salary income and another 2 lakhs from income from my house propery.

    reply
    • gautham January 11, 2018

      There is no loss on your house property. Where is the question of set off?

      reply
  9. Sugata Basu January 16, 2018

    Hi,
    I have an ongoing Home loan for the self occupied property. Now I have got another home loan and purchased the next door flat, joined these properties and using two flats as a single property.
    1. Would I get any income tax benefit from the second home loan as I am getting from the first one?
    2. Can both the properties be shown as self occupied as we have joined the two properties? Please consider that these properties have been registered in different dates and as different properties.
    3. If answer is no for the above cases, then what would be the income tax impact on the second property?

    Kindly guide me.

    Sugata Basu

    reply
    • gautham January 16, 2018

      1. Would I get any income tax benefit from the second home loan as I am getting from the first one?

      2. Can both the properties be shown as self occupied as we have joined the two properties? Please consider that these properties have been registered in different dates and as different properties.

      3. If answer is no for the above cases, then what would be the income tax impact on the second property?

      Ans: You can show only on as self occupied. The other should be shown as “deemed to have been let out” and the corresponding annual rental value should be calculated. If there is a housing loan against the second property (which is declared as “deemed to have been let out”), you can deduct the interest payable against the annual rental value.

      reply
  10. Sneha January 26, 2018

    I am staying in company provided house near office. My own house in another place is not let out. Can I claim 2 Lakh as loss.

    reply
  11. Priya February 22, 2018

    One employee in my office, as given statement of interest paid for his let out property from bank and claims for deduction u/s 24. But he does not shown any income, he gained from it. My doubt is shall I ask the income ( gain or loss). suppose he claimed that he had loss from house property. Then wat can I do, shall I deduct the loss in gross salary as well as deduction u/s 24 .

    reply
    • gautham February 22, 2018

      Please ask the employee to submit details of the income from/annual rental value of the house property. A let out property cannot have zero income.

      reply
      • Priya February 22, 2018

        Thanku for the reply. I asked him, he said that the letout property belongs to his wife and she is a house wife. So he claims the benefit of interest.

        reply
        • gautham February 22, 2018

          If the employee is not the owner of the property, he cannot claim any housing loan benefit.

          reply
  12. Priya February 23, 2018

    Thanku sir. He said she doesn’t have any income. He only repay the interest . In this situation shall I ask him to get undertaking from his wife?

    reply
    • gautham February 23, 2018

      It is wrong to say she doesn’t have any income. She is assessable for income from house property, for the property she owns. The employee cannot show it under his name since he does not own the property. The fact that the employee pays the interest is of no consequence here.

      As the employer, you cannot consider the housing loan interest for the employee’s tax computation.

      reply
  13. Priya February 23, 2018

    Thanks for all the guidance..

    reply
  14. Priya April 13, 2018

    Sir, apartment not yet occupied by the individual but the individual is given interest statement for claim… Its a let out property. I ask for rental income … He said ,property is vacant… What can I do?

    reply
    • gautham April 13, 2018

      Even if he does not receive rent, he should calculate the annual rental value as per municipality guidelines and submit a deemed rent to you.

      reply
  15. Ankita Nag July 16, 2018

    Hi,

    I have house that is build in my native where my in-laws are staying.
    I stay at my work place and pay rent.
    I claim my HRA & for the build house in native:
    1) Can I claim upto 2L only under 24a correct?
    2) What if the interest exceeds 2L ? What about that remaining amount?
    3) What amount here can be claimed under loss? As I am not earning anything from the house that I build.

    reply
    • gautham July 17, 2018

      1) Can I claim upto 2L only under 24a correct?
      Ans: Yes

      2) What if the interest exceeds 2L ? What about that remaining amount?
      Ans: The remaining amount can be carried forward as per the limit specified in the set-off rules.

      3) What amount here can be claimed under loss? As I am not earning anything from the house that I build.
      Ans: You can specify your own-house as a self-occupied property with zero annual rental value and claim interest exemption subject to the limits specified in law.

      reply
  16. SAS July 18, 2018

    I have total loss from house property of Rs 3 Lacs for FY 2017-18.
    Rs. 2 Lacs is set-off against salary income.
    1) Can the balance amount of Rs 1 Lac setoff with other income in this financial year. If yes, then which are those income heads?
    2) You mentioned loss from house property, to the extent not set-off, can be carried forward for eight years. Is there any cap on this carried-forward amount.
    3) With which income heads this carried forward loss can be set-off

    reply
    • gautham July 18, 2018

      1) Can the balance amount of Rs 1 Lac setoff with other income in this financial year. If yes, then which are those income heads?
      Ans: No, the remaining Rs 1 lakh cannot be set-off this year.

      2) You mentioned loss from house property, to the extent not set-off, can be carried forward for eight years. Is there any cap on this carried-forward amount.
      Ans: There is no cap.

      3) With which income heads this carried forward loss can be set-off
      Ans: The loss can be set-off against salary etc. as per the set-off rules.

      reply

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