Budget 2018 needs to revise cap on home loan interest tax break for self-occupied property 

tax22-thinkstockBudget 2017 has capped the set-off of house property loss against any other income at Rs 2 lakhs in a year to bring it at par with self-occupied property.

Possessing a house has always been a dream of every Indian. Moreover, the government now also aims at providing ‘Housing for all’. To make this into a reality, providing more benefits on purchase of a house will boost the housing sector and help Indians fulfill their dream.

Current tax laws allow tax benefit for housing loan interest paid under section 24(b). Unfortunately, the provisions of the act are different when it comes to allowing the tax deduction for a self-occupied property and a let-out property. Budget 2017 has capped the set-off of house property loss against any other income at Rs 2 lakhs in a financial year. It was largely seen as a decision taken to bring the deduction at par with the interest deduction in case of a self-occupied property of Rs 2 lakhs. However, the gap still exists.

As per the tax laws you need to calculate the income or loss from each of the properties owned by you after subtracting the property taxes and standard deduction of 30% of Net Asset Value (NAV). Both of these deductions are not available for self-occupied house property. After the above mentioned deductions, you will arrive at the figure of net rental income from each of your houses.

You can further deduct the interest paid on the housing loan from the net rental income derived above for the property for which the loan has been taken. This interest amount is restricted to 2 lakh in case of self-occupied property. On doing this exercise, you will get the figure of net income or loss from each of the property. Once you total the income from all the houses you will get the figure of total income or loss under the head house property.

If this total is positive, you have to add it to your taxable income for the year. In case if it is negative (loss) then you can adjust this loss to the extent of Rs. 2 lakh from income under other heads of income and remaining loss is allowed to be carried forward for next 8 assessment years to be adjusted against income under the head House Property. However, this carry forward provision is there only for loss from rented property.

The irony is that, for your self-occupied house you can take tax benefit of only up to Rs 2 lakh in any one financial year and any interest paid in excess of Rs 2 lakhs lapses as it can neither be adjusted against the current income nor is it allowed to be carried forward for future adjustment against rental income. This is unfair for small taxpayers who are already facing financial struggles in building a single home. It allows higher tax benefit to those taxpayers who are building their house (on home loan) for renting out in comparison to those who are building it (also on home loan) for residence.

This can be explained better with the below example:

Manish and Rahul are friends and buy similar houses worth Rs 70 lakhs. They take a housing loan of Rs 58 lakhs and are paying annual interest of Rs 5 lakhs. The only difference is that, Rahul will be using this house for his own residence whereas Manish who already owns another house, will be giving this new house on rent. Let us see how the tax benefit differs for them.


Now let’s consider the tax benefit if Manish purchases 2 or 3 house properties with an intention to give them on rent as against Rahul who will use it for his own residence.


The above calculations clearly prove that the current tax laws provide a lower benefit to those who buy a single house property for residence (self-occupied house) as against the investor who invests in property to earn higher income. This goes against the government’s aim to provide ‘housing for all’ by 2022.

Hence, there is a scope for the FM to remove this cap on interest deduction for self-occupied house property (for single or first home buyers). Government should allow adjustment of this loss in the same financial year without any cap or at least allow the remaining (in excess or Rs. 2 lakhs) loss to be carried forward over an indefinite period until the entire loss is nullified.

This move will help in achieving the Government’s objective of ‘housing for all’.