The Union Finances 2023 made the brand new tax regime fairly enticing by lowering tax charges.
So, you’ve got two choices.
- Proceed with the previous 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 will likely be advantageous for salaried individuals until they will declare tax deductions of Rs 4.25 lacs or extra. As a taxpayer, you may calculate tax legal responsibility below each the regimes and go for the one with a decrease tax legal responsibility.
Below 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, 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 below Part 24.
Sure, however not totally right.
You possibly can nonetheless take tax profit for curiosity fee on a house mortgage below 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 House 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 Earnings Tax Act come collectively to present you this tax profit. Part 23, Part 24, Part 71 and Part 71(B) for carry ahead.
Part 23 specifies find out how to calculate Earnings from Home Property. It specifies that the Earnings 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) will likely 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 forms of deductions permitted.
- Customary deduction (of 30% of the Web Asset Worth). Notice: This customary deduction is totally different from the Customary deduction of Rs 50,000 for salaried staff.
- House 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 House 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 residence mortgage curiosity of Rs 2.5 lacs. The utmost deduction for curiosity fee 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 below Earnings from Home property.
Part 71 permits for set-off of Loss below Earnings from Home Property in opposition to 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 below revenue from home property in opposition to 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 residence mortgage curiosity fee comes about.
Should 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 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 modifications 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 Below Earnings from Home Property. That is laid out in Part 115BAC(2)(ii)(b)
Below the brand new tax regime, the tax deduction for residence mortgage curiosity (24b) for a self-occupied property just isn’t allowed. Thus, in case you have one (or two) self-occupied properties and also you go for the brand new tax regime, you then won’t be able to take any profit for residence mortgage curiosity. Thus, the whole 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 below 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 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 may 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 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
Due to this fact, the loss below 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 below Earnings from Home Property to Rs 2 lacs.
Within the Previous Tax Regime
Let’s say your taxable revenue (earlier than rental revenue) is Rs 15 lacs.
Loss below 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.
Notice, in absence of residence mortgage curiosity, your taxable revenue would have been Rs 15 lacs + Rs 2.5 lacs (from home property) = Rs 17.5 lacs.
Thus, residence mortgage curiosity has lowered your revenue by Rs 4.5 lacs. Fairly helpful.
Within the New Tax Regime
Right here too, loss below Earnings from Home Property = Rs 3.5 lacs
Nevertheless, the brand new tax regime doesn’t permit the set off of this loss in opposition to every other head below Part 71.
Therefore, this loss goes waste however you’ve got nonetheless been capable of keep away from paying tax on rental revenue.
In absence of residence mortgage curiosity, you’ll have paid tax on taxable revenue of Rs 15 lacs + Rs 2.5 lacs (rental revenue) = Rs 17.5 lacs.
Due to curiosity, you would not have to pay tax on rental revenue.
Therefore, you pay tax on solely Rs 15 lacs. Taxable revenue lowered by Rs 2.5 lacs as a consequence of residence mortgage curiosity. Or the tax advantage of Rs 2.5 lacs for residence mortgage curiosity paid. Below the New Tax Regime.
Below the brand new tax regime, set-off of loss below Earnings from Home Property just isn’t allowed. Nevertheless, you may nonetheless use it to nullify rental revenue from a let-out property. And that’s your tax profit.
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I’m not a tax skilled. You might be suggested to seek the advice of a Chartered Accountant earlier than appearing on the contents of this put up.
This put up was first printed in February 2020 and has been up to date since.