Interest on the housing loan can be set off against the taxable rent

The Finance Bill 2017 proposes to limit the interest set-off for let-out properties to Rs2 lakh. What is this proposal and how will it impact you?


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I own two houses. One is rented out while the other is self-occupied. Only the self-occupied one has a home loan, which gets me a tax deduction of Rs2 lakh on interest paid. Will I get a higher tax benefit if I rent out this house as well?

 —Navin Bhatia

The quantum of tax deduction towards interest paid on home loans depends on whether the residential property, against which the loan has been availed, is a self-occupied property (SOP) or a let-out property (LOP) or deemed to be let out (DLOP). For SOPs, the deduction towards interest on housing loan is restricted to Rs2 lakh per financial year (FY). But in LOPs, the entire interest paid on the housing loan can be claimed against the taxable rental value, which is determined by factoring specified deductions such as municipal taxes and standard deduction of 30% of the net rental value (i.e., gross rent minus municipal taxes). 

Please note that full facts such as terms of rental income and quantum of home loan interest would be required to understand whether any additional tax benefit can be availed by actually letting out the SOP up to FY2016-17. 

Just for your information, the Finance Bill 2017 (effective for FY2017-18 ), proposed that the house property loss incurred in an FY (which earlier could be entirely set off against any other income earned during the same FY) has been capped at Rs2 lakh per FY. So, you can set off aggregate loss of up to Rs2 lakh incurred from both the house properties (after considering the deduction towards interest on housing loan as aforesaid) against any other income, if any, earned during the same FY. The balance unadjusted house property loss incurred during the FY can be carried forward for set off against house property income for up to eight FYs. 

This amendment is yet to receive the President’s assent and is not final and effective

I have been working for 2.5 years. I have now resigned, to pursue higher education. This was my first job. If I withdraw my accumulated Provident Fund (PF), will it attract tax? Should I withdraw it now or later? 

—Rashmi Prasad

The PF balance can be withdrawn on cessation of employment and the application for withdrawal should be submitted after 2 months have elapsed.  The withdrawal application form can be filed directly to the PF authorities, or through the employer.  

The cumulative PF balance withdrawn from a recognized PF triggers tax liability, if an employee does not render continuous services for a period of 5 years or more to the employer. While determining the period of continuous service, the period of service with previous employer(s) should also be added if the cumulative PF balance maintained with the old employer has been transferred to the PF account of the new employer.

We understand that this was your first job. As the cumulative period of service is less than 5 years (only 2.5 years), withdrawal of accumulated PF balance will be taxable in the FY of withdrawal. The aggregate of the employer’s contribution to PF and interest earned thereon is taxable as salary. Further, the deduction you claimed (under section 80C) on your own contribution to the recognized PF shall also be taxed as salary. The interest earned on your own contribution shall be taxed as ‘Income from other sources’, depending on your income tax slab in each of the FYs during which the PF contributions were made. Surcharge (as applicable) and education cess shall be applicable for each of the FYs. You can avail relief under section 89.

If you transfer the PF balance to the PF account maintained with new employer(s) (in case of future employments) and later on withdraw the balance maintained with the new employer(s) as per the PF provisions, as mentioned before, while computing the period of continuous service with the current employer; then the period of service rendered with the previous employer would be included. Accordingly, where the cumulative years of service with the previous and new employer(s) are more than 5 years, PF withdrawal will not trigger any tax liability.

Parizad Sirwalla is partner (tax), KPMG

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