You Can Take This Deduction Even under the New Tax Regime

Budget 2020 gave a choice to the taxpayers and a reason to rejoice to the tax accountants. As a taxpayer, you have the following two options.

1. Take tax deductions and continue with the old tax regime
2. Opt for the new tax regime and don’t take tax deductions

As a taxpayer, this choice seems relatively simple. You need to calculate your tax liability under both the regimes and go with the one with low tax liability. However, there are always a few grey areas and that increases the need to take services of a tax expert.

We write about loans on this blog and there are quite a few tax deductions that you get for repayment of various loans. All those deductions will go if you opt for the new tax regime. However, as I said, things are never that simple. The way tax rules are worded, you may still be able to take some benefit for interest payments on home loans.

What Are the Various Tax Benefits You Get for Repayment of Loans?

• Section 80C: Up to Rs 1.5 lacs for repayment of principal on a housing loan
• Section 24: Up to Rs 2 lac for payment of interest on a housing loan
• Section 80EEA: Up to Rs 1.5 lacs for interest payment on home loans sanctioned between April 1, 2019 and March 31, 2021. This is subject to meeting other conditions.
• Section 80 EEB: Up to Rs 1.5 lacs for interest payment towards a car loan taken to purchase an electric vehicle.
• Section 80E: Tax deduction for interest payment towards an education loan. There is no cap on the tax benefit on interest payment.

You will have to forgo all these tax benefits if you opt for the new tax regime.

About Section 24, There Is an Interesting Angle

A brief background about how tax benefit under Section 24 works. You calculate the income from the house property (rent or deemed rent). Then, from the rent, you adjust standard deduction (30% of rent) and the interest paid on the housing loan.

Income from House Property = Rent – Standard Deduction – Interest paid on home loan

For a self-occupied property, rental income is zero. Thus, standard deduction is also zero. Therefore, the interest paid on home loan translates to Loss under Income from House Property. You can use this Loss (subject to a cap of Rs 2 lacs per financial year) to set off against other heads of income such as Salary and Other sources. In this manner, you were able to reduce your tax liability.

Now, the new tax regime disallows set off of Loss under Income from House Property.  Therefore, if you have a self-occupied property and opt for the new tax regime, you will not be able to take tax benefit under Section 24.

However, if you have a let-out property, you can still use the interest paid on housing loan to reduce your tax liability. Let’s understand this with the help of an example. Let’s assume the rental income is Rs 3 lacs and the interest paid is Rs 1.6 lacs.

Income from House Property = Rs 3 lacs – Rs 3 lacs*30% – Rs 1.6 lacs = Rs 50,000

On this income, you pay tax at your slab rate. Therefore, even though the rental income during the year is Rs 3 lacs, you have to pay tax on only Rs 50,000. This is allowed under both old and new regimes.

What Is Not Allowed under the New Tax Regime?

Let’s assume another scenario. Rental Income = Rs 3 lacs, Interest Paid = Rs 4 lacs

Income from House Property = Rs 3 lacs – Rs 3 lacs*30% – 4 lacs = -Rs 1.9 lacs

Under the old regime, you can set off this Loss (up to Rs 2 lacs) against other income heads. However, if you have opted for the new regime, you won’t be allowed to set off this loss under other income heads.

Therefore, under the new regime, you can still use the interest paid on the home loan to reduce the tax liability on the rental income. However, if the interest paid exceeds rental income (minus standard deduction), you wouldn’t be able to take tax benefit for the loss (on house property) incurred.

To summarise, the new tax regime only disallows the set-off of Loss under Income from House Property against other income heads. The rules for calculation of Income from House property have not been changed.

Carry Forward of Loss under Income from House Property

As I understand, you can carry forward the loss even under the new regime and set off against the Income in the coming years. So, you may not be able to use this loss to reduce tax liability in this year but you can use this loss to reduce tax liability in the coming years.

For instance, this year, you may have a loss (income from house property) but in the next year, you may have positive income (house property) after adjusting for the current year’s interest. In such a case, you can use loss from the previous year to reduce your tax liability.

Disclaimer/Disclosure: I am not a tax expert. You are advised to consult a Chartered Accountant in these matters before making a decision.