Taxability of Home Loans and Property Income post DTC

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The implementation of the proposed Direct Taxes Code (DTC), which seeks to replace the current Income-Tax Act, 1961 (the Act), is expected in April. While there are speculations on whether this deadline would be met, it certainly is on the anvil. We will take a look at the provisions on taxability of house property income under the revised draft of DTC which was released in August 2010 (DTC 2010) vis-à-vis the current Act.

Scope Of Income

Under the current provisions of the Act, there is a perennial debate over the classification of rental income whether it should constitute as income from house property or as income from business when the renting is in nature of trade or business of the owner. This is not clearly specified in the Act and the interpretations have been based on judicial precedents. The DTC 2010 seems to clarify this by stipulating that income from house property let out in nature of trade, commerce or business is to be taxed as income from house property. Further, the DTC also clarifies that income from letting out of properties used as hospitals, hotels, convention centers, cold storages or forming part of special economic zones, which are taxable as business income, will not be taxed as house property income.

Taxability Of Let-Out Property

As per the current provisions, in case of let-out property, annual value (that is, reasonable expected rent) or actual rent per financial year (FY) whichever is higher is subject to tax. Where the actual rent of a let-out property is low in a FY due to vacancy during any part of the FY, annual value is restricted to actual rent.
Under the DTC 2010, annual value is substituted by a concept of gross rent. Gross rent represents the amount of rent received or receivable from the property during the FY. Similar to the current law, where let-out property is vacant during any part of the FY, only gross rent for the period of occupation is to be considered.

The DTC 2010 also specifies that the rent received in advance is to be included in the gross rent of the FY to which it relates while no such specific provision exists in the current Act. Under the current provisions, where property has been acquired under a housing loan, deduction towards actual interest outgo without any monetary limit is allowed, subject to certain conditions. The same is also allowed in the DTC 2010. In case of under-construction property, the deduction towards interest pertaining to the pre-construction/ pre-acquisition period continues to be split in five equal instalments beginning from the FY in which the property is constructed or acquired.

Deemed To Be Let Out Property

Presently, only one house can be considered as self-occupied and all subsequent houses owned by a taxpayer which may not actually be let out are taxed on a notional basis as "Deemed to be let out property (DLOP)". DLOPs are taxed in the same manner as actual let-out properties.

Under the DTC 2010, the concept of DLOP is proposed to be discontinued. Accordingly, if a property is actually not let out during a FY, then it shall not be taxable. Also, no deductions shall be allowed against such property. This is in line with international practice of taxing real income vis-àvis notional income.
Accordingly, in the above example, while Property 1 and 2 will continue to be subject to tax under DTC 2010, Property 3 will not be taxable and correspondingly no deduction will be available.

Taxability Of Self Occupied Property

Currently, with respect to one self-occupied property, the annual value is considered as "Nil". Further, a deduction towards interest paid on housing loan taken for such property is available up to a maximum of . 150,000 per FY resulting in a loss from house property.

The DTC 2010, much to the respite of the taxpayers, also contains similar provisions with respect to gross rent and allows the deduction of . 150,000 per FY. However, the deduction is allowable from gross total income (GTI) and hence restricted to GTI, instead of being regarded as a loss from house property.

Repayment Of Housing Loan

Under the Act, deduction up to maximum . 100,000 per annum (as a part of other eligible investments under Section 80C of the Act) can be claimed from gross total income towards principal repayment of housing loan.

However, under the DTC 2010, no tax deduction from the gross total income is available towards repayment of principal amount of a housing loan. Individuals who do not have other eligible investments such as provident fund contributions, life insurance premiums etc. would need to look for other avenues to invest to avail of maximum deductions.

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