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How scrapping of tax on notional rent on second house will affect individual taxpayers
February, 11th 2019

The government’s move to make two self-occupied houses tax-free will especially benefit the middle-class taxpayers in India.

It is no secret that the growth of the Indian real estate sector has been slow in recent years, but the announcements made in the Interim Budget 2019-20 could very well change that. The government has introduced several tax reforms pertaining to real estate firms as well as individual taxpayers in the latest budget announcement, and one of the major proposed reforms is the exemption of income tax on notional rent for a second self-occupied house.

Before we begin, let us explain the concept of notional rent. Under the Income-Tax Act if a person owns 2 or more houses, then 1 house is considered as tax-free and the other house at the option of the assesse would be treated as taxable by considering notional rent on that. Notional rent is computed on the basis of Expected Rent (ER) and Gross Annual Value (GAV) of the house property. The tax exemption earlier applied only to one house. Notional rent was considered as income on the second house and was, therefore, taxable. This discouraged those who wanted to buy more than one house as an investment, as it meant paying additional tax on the second house, thus negatively affecting the purchase sentiment in the market.

The budget proposal for the exemption of notional rent on the second self-occupied house is good news for people looking to buy another house, or those who have a house in one city but work in another, and hence have a second home there. The new rule means people will be completely free from paying tax on up to two self-occupied houses. Tax on notional rent will only be applicable if one has a third house or more, which would automatically be considered as having been rented out. In such a case, one can choose any two houses to be considered as self-occupied, while the third or more will be taxed as per the current provisions.

The only challenge that the owner may face with the changes is the loss under the ‘Head Income from House Property’. After the changes, the owner is allowed to set off the interest paid on housing loan (loan taken for only up to 2 houses) against any other income for that year up to Rs 2 lakh only. The remaining loss if any would be carried forward for eight years and can be set off against the income under the head ‘Income from House Property’.

This, however, is unlikely to deter most people from investing in a new house, and won’t affect a majority of people who do not have any pending loans on their houses. The government’s move to make two self-occupied houses tax-free will especially benefit the middle-class taxpayers in India who own two homes and have had to pay taxes for both all these years. Indians staying abroad or in different cities due to work will also find relief in this new reform. On the balance, the move will majorly benefit taxpayers and stimulate the real estate market in India, provided it is approved and then implemented with a well thought-out process.

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