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Is Interest on Home Loan Allowed as Deduction under New Tax Section 115BAC

is-interest-on-home-loan-allowed-as-deduction-under-new-tax-section-115bac

The Finance Bill, 2020 has introduced a new section 115BAC for computation of total income of an Individual and HUF under which it gives an option to the taxpayer to pay income tax at a concessional or lower rate compared to rates in force or under the old tax regime. However, if one opts for the new tax rates specified in section 115BAC, then he has to forego certain deductions and exemptions.

Under the new optional tax regime under section 115BAC of the Income Tax Act, 1961, an individual who has let-out their house property on rent can avail the deduction for interest paid on housing loan or capital borrowed for acquiring or constructing the house property. Unfortunately, such an individual cannot claim the deduction for interest paid on the home loan or capital borrowed for acquiring or constructing the house property if the house property is self-occupied. The Income Tax Act allows a person to hold two house properties as self-occupied without attracting any deeming provision.

Effective financial year 2020-21 (or assessment year 2021-22), there will be two tax regimes for personal income tax purposes.

1. One tax regime called as Old tax regime under which an individual can claim all the admissible deductions and exemptions in computing his total income and then computes the tax payable as per the tax rates specified in the relevant Finance Act. This regime is the same which is continued in FY 2019-20 or for AY 2020-21. This method of computation of income and tax is continued in AY 2021-22 and is named as 'Old regime of tax'.

Under the old regime of tax, the tax rates are specified in the Finance Act, 2020. As per Paragraph A of Part-III of the First Schedule of the Finance Act, 2020, the tax rates for Individuals and HUFs for Assessment Year 2021-22 (Financial Year 2020-21) are given below-

Table-1
Category of Taxpayer
Individual/HUF/AoP/BoI/AJP
Residential Status
Resident and Non-Resident
Age of the Taxpayer
Under 60 years of age

Total Income
Income-Tax Rate
Up to Rs. 2,50,000
Nil
Rs. 2,50,001 to Rs. 5,00,000
5%
Rs. 5,00,001 to Rs. 10,00,000
20%
Above Rs. 10,00,000
30%

Table-2
Category of Taxpayer
Individual (Senior Citizen)
Residential Status
Resident
Age of the Taxpayer
Above 60 years of age

Total Income
Income-Tax Rate
Up to Rs. 3,00,000
Nil
Rs. 3,00,001 to Rs. 5,00,000
5%
Rs. 5,00,001 to Rs. 10,00,000
20%
Above Rs. 10,00,000
30%

Table-3
Category of Taxpayer
Individual (Super Senior Citizen)
Residential Status
Resident
Age of the Taxpayer
Above 80 years of age

Total Income
Income-Tax Rate
Up to Rs. 5,00,000
Nil
Rs. 5,00,001 to Rs. 10,00,000
20%
Above Rs. 10,00,000
30%

2. Another tax regime called a New tax regime under which an individual can pay income tax on his total income at a concessional or lower rate as compared to Old tax regime. However, in the new tax regime, the taxpayer has to forego certain deductions and exemptions while computing the total income and then computes the tax payable as per the tax rates specified in Section 115BAC of the Income Tax Act, 1961. This regime is newly introduced from AY 2021-22 or FY 2020-21. 

The new tax regime is optional for a taxpayer. In other words, a taxpayer may opt for the 'old regime of tax' or may opt for the 'new regime of tax'. Anyone method of tax regime may be chosen by the individual or HUF as per his wish.

Under the new regime of tax, the tax rates are specified in section 115BAC of the Income Tax Act, 1961. No reference to the Finance Act is required for determining the tax rates. The tax rates for Individuals and HUFs for Assessment Year 2021-22 (Financial Year 2020-21) under the new tax regime are given below-

Table-A
Sl. No.
Total income
Rate of tax
1.
Upto Rs 2,50,000
Nil
2.
From Rs 2,50,001 to Rs 5,00,000
5 percent
3.
From Rs 5,00,001 to Rs 7,50,000
10 percent
4.
From Rs 7,50,001 to Rs 10,00,000
15 percent
5.
From Rs 10,00,001 to Rs 12,50,000
20 percent
6.
From Rs 12,50,001 to Rs 15,00,000
25 percent
7.
Above Rs 15,00,000
30 percent

Read More on New Income Tax Slab Rates after Union Budget 2020

Under section 115BAC(2), the total income of an Individual and a HUF shall be computed -

(i) without any exemption or deduction under the following sections-

Section
Particulars
Section 10(5)
Exemption for Leave Travel Allowance
Section 10(13A)
Exemption for House Rent allowance
Section 10(14)
Exemption from any other allowance
Section 10(17)
Exemption from allowance to MPs or MLAs
Section 10(32)
Exemption of Rs. 1,500 in case of clubbing of minor child income
Section 10AA
Exemption for newly established Units in Special Economic Zones
Section 16
Standard Deduction of Rs. 50,000; Entertainment Allowance of Rs. 5,000 and Professional Tax
Section 24(b) [in respect of the property referred to in section 23(2)]

Interest paid on home loan
Section 32(1)(iia)
Additional Depreciation
Section  32AD
Deduction for Investment in new plant or machinery in notified backward areas in certain States.
Section  33AB
Deduction for deposit into Tea development account, coffee development account and rubber development account
Section  33ABA
Deposit into Site Restoration fund
Section 35(2AA)
Deduction for  expenditure on scientific research
Section 35(1)(ii)
Deduction for  expenditure on scientific research
Section 35(1)(iia)
Deduction for  expenditure on scientific research
Section 35(1)(iii)
Deduction for  expenditure on scientific research
Section 35AD
Deduction in respect of expenditure on specified business
Section 35CCC
Deduction for expenditure on agricultural extension project
Section 57(iia)
Deduction from family pension income , equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less.
Deduction under Chapter VI-A
Except section 80CCD(2) and section 80JJA
Section 80C, Section 80D, Section 80CCD(1B), Section 80G, et

(ii) without set-off of any brought forward business loss or unabsorbed depreciation to the extent it is related to any of the deductions referred above,

(iii) without set-off of any loss under the head “Income from house property” with any other head of income.

There are other restrictions but are related to the computation of business income hence not discussed here. A detailed discussion on section 115BAC can be found here.

The restrictions related to 'house property' income are found in two instances in section 115BAC(2). In one instance, it restricts deduction under section 24(b) and in another instance, set-off of any loss under the head “Income from house property”  is restricted with any other income in the year.

A house property under the Income Tax Act, 1961 may be-
(i) a self-occupied house property
(ii) an actually let-out house property, and
(iii) a deemed to be let-out house property.

Section 24 of the Income Tax Act deals with 'Deductions from income from house property'. It states that Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely-
(a) a standard deduction equal to 30 percent of the Net Annual Value, and
(b) Interest payable on borrowed capital for acquisition, construction, repair, renewal or reconstruction of the house property.

As per section 24(b), in the first stance, the full interest amount payable on housing loan is deductible from the Net Annual Value. However, later it excludes a self-occupied house property, as referred to in section 23(2), from claiming the full interest amount as a deduction from the NAV. It also restricts the amount of deduction for such self-occupied house property to Rs. 2,00,000. The limit is Rs. 30,000 in certain cases and details can be read here.

What is left thereafter is only a let-out house property - an actually let-out house property or a deemed to be let-out house property.

Hence, it follows that the full amount of interest payable on borrowed capital for acquisition, construction, etc. can be claimed only for a let-out or deemed to be let-out house property.

Example: Mr. Rakesh is the owner of a house property which he acquired with a home loan. during the previous year 2020-21, he has paid Rs. 3,00,000 as interest on home loan. Find out the amount of interest that can be claimed as deduction under section 24(b) if the house is (i) self-occupied and (ii) Let-out for an annual rent of Rs. 2,40,000.



Particulars
If the house property is self-occupied 
[S. 23(2)]
If the house property is let-out
[S. 23(1)]
Gross Annual Value
Nil
2,40,000
Less: Property taxes paid
NA
Nil
Net Annual Value
Nil
2,40,000
Less: Interest on home loan
2,00,000
3,00,000
Income from house property
(-)2,00,000
(Note-1)
(-)60,000

Note 1: In the case of self-occupied house property, the maximum amount of deduction for interest on house building loan is restricted to Rs. 2,00,000. Hence, Rs. 2,00,000 is claimed as a deduction under section 24(b).

Note 2: In the case of let-out house property, the full amount of interest on house building loan can be claimed as a deduction. Hence, Rs. 3,00,000 is claimed as a deduction under section 24(b).

In this case, it is pertinent to know that deduction for municipal taxes or property taxes is allowed under section 23(1). Section 23(1) states that deduction for municipal taxes or property taxes is allowed on payment basis from the 'Annual Value' of the house property. Further, section 23(2) specifies that the 'Annual Value' of a self-occupied house property shall be taken as 'Nil'.

In this backdrop, if we analyze section 115BAC, we will find that at the first instance of restrictions of deductions and exemptions (refer the table) it is stated that total income shall be computed without any deduction under section 24(b) [in respect of the property referred to in section 23(2).]

The deduction restricted in section 115BAC is with respect to the deduction allowable under section 24(b) only if the house property falls under section 23(2). As stated earlier, only a self-occupied house property is covered by section 23(2) for which a maximum amount of deduction for interest on housing loan is limited to Rs. 2,00,000.

Hence, in case of a self-occupied house property, no deduction is allowable under section 24(b) under the new tax regime. As stated, apart from self-occupied house property, there are other two types of house property - let-out and deemed to be let-out, which are eligible for deduction under section 24(b) under the new tax regime.

With respect to payment of property taxes, it should be remembered that the same is allowed under section 23(1) and hence does not hit by any restriction of section 115BAC. Similarly, the standard deduction of 30 percent is allowed under section 24(a) and hence the same is allowed under the new tax regime. These hold good only for a let-out or a deemed to be let-out house property. In the case of a self-occupied house property, since the annual value is considered as nil, the question of the deduction for property taxes and standard deduction does not arise.

Set-off of Loss from House Property under the new tax regime: The second limb of restriction in the context of income from house property is the computation of total income shall be without set-off of any loss under the head “Income from house property” with any other head of income.

In the given example of Rakesh above, in case of let-out house property after availing the deduction for interest on home loan for Rs. 3,00,000 there is a 'loss' of Rs 60,000. As per section 115BAC, this loss of Rs 60,000 cannot be set off with any other income by Rakesh. Suppose Rakesh has salary income of Rs.  5,10,000 and he opts for new tax regime prescribed under section 115BAC, he cannot set off of Rs.  60,000, being the loss from House Property, with his salary income. In old tax regime, however, he could adjust loss from house property of Rs 60,000 with his salary income.  His total income would be then Rs 4,50,000. Under new tax regime his total income would stand at Rs 5,10,000.

One important point to note here is that the provisions related to set off of loss from House Property from any other income in the same financial year is contained in section 71 of the Income Tax Act. Section 71(3A) allows maximum amount of set-off of loss from House Property for Rs 2,00,000 in a financial year and the remaining loss can be carried forward to next year to be set off against income from House Property of the next year.  Such unabsorbed loss from house property can be carried forward for 8 years as per section 71B. 

Section 115BAC while restricting the set-off of loss from House property with any other income does not make any reference to section 71 or section 71B. Instead, it simply states that under section 115BAC(2) total income shall be computed without any set-off of loss from House Property. Does it mean that such loss from house property can be set off under section 71? It should not be forgotten that section 115BAC begins with a non-obstante clause 'Notwithstanding anything contained in this Act'. 

However, such an overriding effect is only with respect to the extent of disallowances or restrictions imposed by section 115BAC(2) for the purpose of computation of income under that section.  There is no general rule which allows set-off of loss from house property with any other income, rather, it is allowed under a specific provision of law - section 71. Section 115BAC(2) does not point to any specific section. The overriding effect of this section is limited to the other provisions of law which is expressly provided in this provision and does not go beyond that. Hence, in my view, since section 115BAC(2)(ii)(b) does not specifically refer to section 71, the loss from house property is allowed to be set-off from any other income in the same financial year.

There is another contrary view also. This section indeed overrides section  71 so far as loss from house property is concerned. Even if section 115BAC(2)(ii)(b) does not specifically refer to section 71 but since only this section allows set-off of loss from house property with other income, section 71 is overridden by section 115BAC(2)(ii)(b). Moreover, section 115BAC is a specific provision and hence this provision will prevail.  Furthermore, it is the intention of the lawmakers to restrict the set-off of loss from house property with any other head of income and hence set-off of loss from house property is not allowed with any other income.

However, it may please be noted that the first view is subject to litigation since the same will not be accepted by the income tax authorities.

Carry forward of Loss from House Property under new tax regime: Section 115BAC nowhere restricts carry forward of unabsorbed Loss from House Property. The provisions related to Carry forward and set off of loss from house property is contained in section 71B of the Income Tax Act. Section 71B provides that where there is any unabsorbed loss from house property the same shall be carried forward and shall be set-off with 'income from house property' in the subsequent assessment year(s) and shall be carried forward for a maximum period of 8 years.

It must be remembered that only in the first year, the loss from house property can be set-off with any other income, say, income from salary. When the unabsorbed loss from house property is carried forward in the subsequent years then the same can be set-off only with income under the head house property. It cannot be set-off with any other head of income.[Section 71B]

Section 115BAC(2)(ii)(b) only prohibits set-off of any loss under the head “Income from house property” with any other head of income which is possible only in the first year of loss. In the subsequent years, inter-head adjustment of brought forward loss is not permissible. Hence, section 115BAC(2)(ii)(b) does not operate in case of carry-forward of loss from house property since in such a case, the loss is set-off with the same head of income under the head 'income from house property'.

Hence, even if it is assumed that the second view prevails (loss from house property cannot be set-off with any other head of income) in case of set-off of Loss from House Property under the new tax regime, it implies that the loss that is not set-off in the current year and is eligible to be carried forward to subsequent years as there is no restriction to carry forward the unabsorbed loss from house property. Once the loss is carried forward in the subsequent years, then the same can be set-off with income from house property only and cannot be set-off with any other head of income under section 71B which is beyond the restriction of section 115BAC(2)(ii)(b).

Hence, in the given example of Mr. Rakesh, the loss of Rs. 60,000 if not set-off in AY 2021-22, the same can be carried forward for the next 8 years and is eligible to be set-off from income under the head house property only.

Further, the memorandum to Finance Bill, 2020 also supports this view. It states that loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law.

Based on the above discussion, it can be concluded that if an individual opts for new tax regime under section 115BAC and owns a house property then-

(a) in case of self-occupied house property, no deduction for interest on home loan is allowed. Under the old tax regime, the same is allowed up to Rs. 2,00,000.

(b) in case of a let-out house property, although deduction for interest on home loan is allowed but any loss under the 'income from house property' will not be allowed to be set-off with any other head of income (though another view is also possible as discussed above)  but the unabsorbed loss from house property can be carried forward.



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