Suggestions on Clause 31 of Finance Bill / Budget 2017 by ICAI – Section 71(3A) – Restriction on set-off of loss from House property – Restriction to be done away with

The Finance Bill 2017 proposes to insert sub-section (3A) in secti on 71 to provide that set-off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year. However, the unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years in accordance with the existing provisions of the Act.

In light of the proposed insertion of sub-section (3A) in section 71, there will be following implications:

  • Any person (individual or a corporate) who has income under the head “Income from House Property” cannot claim a set off of interest paid exceeding Rs. 2 Lakhs against any other source of income. Such excess would be carried forward for eight years.
  • This amendment may have a far reaching negative impact for real estate sector and financial sector.
  • As section 71 does not carve out individuals, the honest tax payers i.e., salaried class tax payers would be affected the In this context, it is relevant to note that the Finance Minister has, in his budget speech, clearly stated the following: –

“While the Government is trying to bring within tax-net more people who are evading taxes, the present burden of taxation is mainly on honest tax payers and salaried employees who are showing their income correctly…”

This amendment would have serious repercussions on the honest taxpayer who have made bonafide investments in the house properties and have incurred significant amount of interest outflows from their hard-earned income. Considering that in most of cases, the prices of properties have gone down by more than 20-25 per cent in the past 3 to 4 years, the owners are already burdened with the reduction in the value of property combined with interest cost. This provision would further compound the misery of the owners as apart from the huge loss of capital and outflow of interest, their tax burden would also increase substantially.

Let us take a simple case of salaried individual paying interest on housing loan, the details of which are given hereunder:

Particulars Amount (In Rs.)
Salary income 25 lakhs
Property purchased under
construction in FY 2013-14
80 lakhs
Loan taken on 1 Apr 2013 64 lakhs
Year of possession FY 2016-17
Annual rental amount 2.40 lakhs
Income from house property 1.68 lakhs (2.4 lakhs less 30%)
Accumulated interest

– FY 2013-14 – INR 6 lakhs

– FY 2014-15 – INR 6 lakhs

– FY 2015-16 – INR 6 lakhs

18 lakhs
Interest on housing loan to be claimed for FY 2016-17 9.6 lakhs

(6 lakhs for FY 2016-17 and 3.6 lakhs as pre-acquisition interest)

The total accumulated loss is Rs. 18 lakhs.

The assessee was setting off loss of Rs. 7.92 lakhs from house property against salary income of Rs. 25 lakhs till now. If the proposed amendment is effected, assessee will be losing on the interest already incurred and paid and may not be able to claim such loss in future year considering the low rentals. In this case, the hit on monthly cash flow for the individual would be approximately Rs. 20,000.

Generally, middle class and lower class people invest in property by obtaining loan from banks. The amount of interest paid is always higher than rental income earned such property and as per the current provisions, the loss could be set-off against other income. This has always been a motivator to invest in real estate. However, now restrictive provisions are proposed in respect of set-off of loss from house property. Further, the period for which such loss can be carried forward for set-off against income from house property is only eight assessment years. However, practically there would not be any positive income from house property since interest cost is very high.

Suggestion:

It is suggested that:

a. This change in provision alters the position of taxpayer in respect of transactions done by him taking into account the prevailing tax laws. This change is also having the effect of denying the benefit of set-off of pre-construction interest against other income under other heads, if the same along with current year interest exceeds Rs.2 lakh. In other words, this change is having retroactive effect which is against the stated policy of Government. If any change is required to plug the tax benefit, the same should be in respect of housing loans taken on or after 1.4.2017 or houses purchased on or after 1.4.2017.

b. “House for all” is on priority list and the prime objective and initiative of the Government. The proposed provision may work against the initiative of the Government to provide a fillip to the housing sector. Availability of affordable houses on rent is also an essential priority of the Considering the high priority of housing sector, this restriction may be done away with.

Source- ICAI Post-Budget Memoranda-2017

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One response to “Remove proposed Restriction on set-off of loss from House property: ICAI”

  1. Dr. Arun Draviam says:

    weird illustration with over simplistic assumptions like salary will stay put at Rs. 25 lakh over 8 years, how interest is accumulated to Rs. 18 lacs in 2013-14, the very year of availing loan. EMI includes an element of principal repaid. Are there no deduction on the principal repayments?

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