The Direct tax Code Bill 2011 (DTC), has given relief to the property owners on two major account, firstly, no deemed taxation for House Property and secondly, deduction for interest for self occupied house property.’ While, the concept of deemed taxation of more than one house property has been done away with and their expectation of a simple mechanism of taxation of rental income has also been considered to a great extent.
A quick recap –Revisiting the DTC discussion that is on for over a year can provide a basis of the analysis. The erstwhile DTC Bill of 2009 proposed certain changes that brought about discomfort to a common man, who owns property. Presumptive basis for calculating notional rent from house property with reference to cost of construction/ acquisition and no deduction of interest on housing loan in case of a self occupied property as well as for pre-construction/ acquisition period interest, contrary to the provisions in the prevailing Act, were the key dampeners. While the Revised Discussion Paper back the deduction for interest on housing loan in case of a self occupied property, it did not allow a deduction for the pre-construction/ acquisition period interest.
The final take
Income from house property
DTC bill prescribes a simplified method of computing Income from house property on the basis of gross rent i.e. the amount of rent received or receivable contractually for the financial year. From the amount of gross rent so arrived at, deductions on account of municipal taxes, standard deduction on the Gross rent and deduction of interest on loan paid, during the financial year are available. Hence, no tax is proposed to be levied in case of multiple house properties, which are lying vacant or are used for self-occupation. Under the present Income-tax Act, except for a self occupied property, tax is required to be paid in respect of other properties on a deemed rental basis.
Treatment of deduction on account of interest paid towards housing loan
The Bill also re-introduces provisions for deduction on account of interest on housing loan in case of a self occupied property (subject to an upper limit of Rs. 150,000) as well as pre- construction/ acquisition period interest in five equal installments. Interestingly, the Bill proposes to change the scheme of deduction for interest on loan for self occupied house property. In case of self occupied property, the deduction for interest on loan taken is available from gross total income, unlike the scheme of computation under the present Act.
On the flip side, no relief has been provided for the principal amount of repayment of loan as is prevailing in Section 80C of the present Income-tax Act. Further, standard deduction on account of repairs and maintenance has been reduced from the existing 30% of (gross rent less municipal taxes) to 20% of gross rent.
Broadly, the rules are in sync with the present system of taxation, but one has to wait till April 2012 to see how it unfolds for the actual users as well as the investors. However, the provisions of the DTC bring in a new mechanism for taxation of house property and will hopefully ensure more compliance with the tax provisions.
No Benefit on Repayment of principal amount of a housing loan
Under the Act, deduction up to maximum Rs 100,000 per annum (as a part of other eligible investments under Section 80C of the Act) can be claimed from gross total income towards principal repayment of housing loan.
However, under the DTC 2010, no tax deduction from the gross total income is available towards repayment of principal amount of a housing loan. Individuals who do not have other eligible investments such as provident fund contributions, life insurance premiums etc. would need to look for other avenues to invest to avail of maximum deductions.