Property as an investment loses its charm!

Borrowers claiming unlimited tax benefits on interest payment towards home loans for a rented out second property will have their tax deduction capped from 1 April 2018. While individuals today use this window to set off any loss arising from property against salary or other income, without any upper limit, they will be able claim a set off only up to Rs 2 lakh in subsequent years. By paring down this major tax sop for second home buyers, the Budget has diluted the potential of property as an investment.

This is how it works: Assume you had taken a loan for a second home with an interest outgo of Rs 6 lakh last year. If you had rented out the house for Rs 15,000 a month, or Rs 1.8 lakh a year, you were allowed to set-off or adjust the entire loss of Rs 4.2 lakh (Rs 6 lakh – Rs 1.8 lakh) against your salary income or any other source of income. From 1 April 2018, the set-off you can claim will be capped at Rs 2 lakh, even if the loss extends beyond this threshold. Kuldip Kumar, Partner and Leader, Personal Tax, PwC India, says, “You will be allowed to carry forward the remaining losses not claimed for up to eight years, but the immediate relief will be capped at Rs 2 lakh.” This effectively removes an anomaly that allowed individuals buying second homes on loan to enjoy higher tax relief than those buying for own use.

Many invested in the property market using this relief to lower their tax burden and bolster effective rental yield. With the tax shield removed, investment in housing is expected to take a hit. “This can be a double-edged sword. It can bring down property prices significantly. But it can also demotivate investors who can invest in property and rent it to those less privileged,” says Vaibhav Sankla, Managing Director, H&R Block India.

Property as investment to lose edge after Budget 2017

“Some individuals were taking on heavy loan burdens for second homes simply to avoid taxes. This rationalisation in tax relief will put a break on this habit,” says Suresh Sadagopan, Founder, Ladder 7 Financial Services. According to him, the habit made little sense given the low rental yields and high maintenance cost of property. The Rs 2 lakh cap will particularly affect those who have high-ticket home loans and are in the initial years of repayment, when the interest component comprises a chunk of the EMIs. There is another dampener for landlords. Tenants will now have to deduct 5% TDS on rent exceeding Rs 50,000 a month. However, this will affect only a small number of home owners, given the high threshold.

The Budget has given some relief on capital gains taxation on immovable property by lowering the holding period requirement for long-term capital gains to two years from the earlier three. This means home owners can enjoy a slightly lower tax rate—20% after indexation benefit—on capital gains at the time of sale of the house after two years. Earlier, they would have incurred tax at the marginal rate if property was sold within three years.

Home owners can now liquidate the property earlier at lower tax rates,” says Rahul Manjrekar, Partner, Tax & Regulatory Services, KPMG. The reduction in holding period is expected to bring more inventory into the resale housing market as existing home owners who have been holding on to their property to qualify for indexation benefits on sale will be in a position to do so immediately.

In another development, the base year for indexation of capital gains is proposed to be shifted from 1 April 1981 to 1 April 2001 for all classes of assets including immovable property. Experts say this shift in base year will allow more realistic computation of acquisition cost of the when claiming indexation benefits at the time of sale, and possibly reduce the capital gains tax burden.

Property as investment to lose edge after Budget 2017

Credits ET Realty

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