Will ‘Real Buyers’ Make a Come Back in 2017?

Monthly rent is a great way of earning constant income without much effort. Especially in metro cities where properties fetch healthy rents as denizens migrate every year for better job and educational opportunities. Realising the benefits, in the last few years, buying a second home through home loan route and renting it became a popular trend. And why won’t it be! After all, one could enjoy constant income as well as tax benefits. However, the recent budget cracked a whip for such investors.

The Finance Minister in his speech said, “In order to address the existing anomaly of interest deduction in respect of let-out property vis-à-vis self-occupied property, it is proposed to restrict set off of loss from house property against income under any other head during the current year up to Rs 2 lakh. The loss not so set off would be allowed to be carried forward for set off against the house property income for eight assessment years.” Thus, under the Section 71 of the Income Tax Act, the owner of the second home can now just set off an amount of up to Rs 2 lakh as against no cap earlier.

Till now, if you had taken a home loan for your second property and put it on rent, 30 per cent of the rental income could be claimed under standard deductions, plus municipal taxes paid for the property. Apart from that, you could also enjoy deductions on the interest paid on the home loan. Thus, the announcement came as a shock for investors enjoying tax benefits on the interest paid for their rented-out property.

Now, let’s understand the impact in detail.

Let’s assume Ram is earning Rs 35,000 per month from his property that he has rented out.  He has a loan on which he pays a total interest of Rs 10 lakh per annum. Now, considering standard 30 per cent deductions on rental income (Rs 1,23,000) and Rs 10,000 for municipal taxes, till now Ram could show Rs 7.13 lakh as loss from his rented property. But, with the new announcement, he will be able to show the loss of only Rs 2 lakh, a difference of nearly Rs 5.13 lakh. Thus, he will have to now shell out more money from his pocket.

Clearly, the major intention behind the move is to subsidise first-time home buyers instead of investors.

So, how will it impact the real estate market? Well, after demonetisation, sales volume have already decreased and with this new announcement, the sales are likely to be impacted further as investors will now shy away from the market. Second, the impact is likely to be felt more on the luxury properties.

On the flipside, more end-users will enter the market as against the investors that will put a full stop to speculations resulting in price rise.

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