How Will Tax Exemption On Notional Rent For Second House Affect Taxpayer?

To boost the ailing real estate sector as well as provide relief to individual taxpayers, Interim Budget 2019-20 has come up with several tax reforms and of these a major announcement has been scrapping of tax on notional rent for a second self-occupied house.

Implication of scrapping of tax on notional rent on second house for individual taxpayers:

To understand the impact of the proposed tax reform, we will first clarify the concept of 'notional rent'. Suppose if an individual owns two or more houses then under the Income Tax Act one of the houses is deemed as tax-free while the other shall be treated as taxable on the basis of the notional rent for that. For the computation of notional rent on second self-occupied house, expected rent (ER) and gross annual value (GAV) of the property are taken into account.

'Notional rent' was taken as income on the second house property and hence was included in the tax bracket. But with the latest proposal in the Interim Budget 2019, individuals will not have to shell-out any tax on up to two self-occupied houses. The move will encourage prospective real estate buyers who were until now reluctant to buy a second house as an investment due to the taxation of notional rent on second house property. Also, the provision comes as a relief to those who have a house in one city, but due to work life maintain another house in other city.

Tax on notional rent hence will apply only in a case if an individual has three or more houses. And under such a circumstance, one is free to select any of the two houses to be treated as self-occupied for income tax purposes, while the third or more house property will be taxed basis the prevailing provisions.

Challenge for the home-owner due to the scrapping of tax on notional rent

The property owner due to the changes will suffer only in respect of loss under the 'Head Income from House Property'. After the new provisions kick in, the owner is allowed to set-off the interest on home loan (loan for up to two houses only) against any other income for that year up to Rs 2 lakh only. And 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'.

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