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Setting off loss from house property against salary income

In the budget for FY 2017-18, the Government of India introduced a proposal which reduces the extent to which loss from house property can be set off against other income including salary income. There seems to be confusion in the minds of some people as to how this proposal limits the tax benefit. The fact that some popular online publications have published incorrect information about this proposal has not helped the cause. This blog post attempts to throw some light on what the government proposed in the Finance Bill and how some have misunderstood the proposal.

Setting off loss from house property (prior to FY 2017-18)

In case of loss from house property, an employee could set off the same against his salary income without any limit. This was the rule prior to FY 2017-18. For example, if an employee’s loss from house property was Rs 6 lakh and his salary income was Rs 20 lakh, the employee needed to pay tax only on a salary of Rs 14 lakh (Rs 20 lakh minus the loss of Rs 6 lakh on house property).

The algorithm for setting off loss from house property against salary income is as follows.

Step 1: Calculate the annual value of the property (Section 23 of the Income Tax Act).

In case of self-occupied property: Rs 0.

In case of let-out property: Actual rent received/deemed rental value (as the case may be).

Step 2: Calculate the deductions (Section 24 of the Income Tax Act).

In case of self-occupied property: Actual interest payable or Rs 2 lakh, whichever is lower.

In case of let-out property: Actual interest payable (without any limit) plus other deductions such as municipal taxes paid.

Step 3: Calculate the loss from house property.

For each property, if the total deduction is more than the total annual value, there is a loss on the house property. Add up the profit/loss across properties and check if there is an aggregate loss on house properties.

Step 4: Set off loss under “Income from House Property” against the salary income (Section 71 of the Income Act).

In the event of an aggregate loss from house properties, set it off against the salary income. This reduces the taxable salary income. Please note that the set-off is available without any restriction. For example, if the loss from house property is Rs 8 lakh and the income from salary is Rs 8 lakh, the total taxable salary after set-off is Rs 0.

What does the Finance Bill 2017 change?

The Finance Bill 2017 does not restrict any of the deductions specified under Section 24 of the Income Tax Act. The Finance Bill simply restricts the extent of loss from house property which can be set-off against the salary income in a year, by way of an amendment to Section 71 of the Income Tax Act.

Following sub-section (3A) shall be inserted after sub-section (3) of section 71 by the Finance Act, 2017, w.e.f. 1-4-2018 :
(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.

In other words, irrespective of the amount of loss from house property, the set-off shall be restricted to a maximum of Rs 2 lakh in a year. For example, if the loss from house property is Rs 8 lakh in FY 2017-18 and the income from salary is Rs 8 lakh, the loss from house property that can be used for set-off shall be restricted to Rs 2 lakh and the total taxable salary after set-off shall be Rs 6 lakh. This move will negatively impact employees with high salary who pay housing loan interest on multiple house properties. The reduction in tax benefit could be significant for some of the employees.

We reiterate that the Finance Bill does not restrict the deduction but only restricts the set-off. This distinction is important because the loss from house property, to the extent not set-off, can be carried forward for eight years immediately succeeding the year in which the loss is incurred and the loss can be adjusted against income chargeable to tax under the head “Income from house property” in subsequent years.

Incorrect media reporting

We find, somewhat surprisingly, many respected publications having incorrectly reported on this issue. Let us take a look at some of the incorrect reporting.

“Budget restricts tax benefit on second house to Rs 2 lakh,” reads a headline. This is incorrect since the Finance Bill makes no reference to the “second house.” The article pertaining to the headline gives one an impression that the benefit from let-out property shall be the same as that from a self-occupied property (Rs 2 lakh). This can be misunderstood as benefit (of Rs 2 lakh) from let-out property being available in addition to the benefit from self-occupied property (Rs 2 lakh). The fact is the total benefit (considering both self-occupied and let-out property) is restricted to Rs 2 lakh.

“Union budget 2017: Tax benefit on second house restricted to Rs 2 lakh,” reads another headline. The fact is that the benefit even from the first house (irrespective of whether it is self-occupied or let-out) is restricted to Rs 2 lakh.

We have also come across an instance where the tax calculator utility on the website of a leading tax-return service provider handles the set-off incorrectly and consequently making incorrect tax calculation for FY 2017-18. The calculator restricts the deduction on house property to Rs 2 lakh instead of restricting the set-off on account of loss from house property to Rs 2 lakh.

Please exercise caution while handling loss from house property declared by your employees for calculating salary TDS for FY 2017-18.