While most discussions on the New Tax Regime revolve around lower tax slabs and the loss of popular deductions under Sections 80C and 80D, one crucial restriction often escapes attention—the treatment of losses under the head “Income from House Property.”
Many taxpayers assume that if interest on a home loan for a let-out property exceeds the rental income, the resulting loss can still be adjusted against salary or other income. However, Section 115BAC specifically prohibits this benefit for taxpayers opting for the New Tax Regime.
The restriction is contained in Section 115BAC(2)(ii) and is further reinforced by Section 115BAC(3) of the Income-tax Act.
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What Does Section 115BAC(2)(ii) Provide?
Section 115BAC(2)(ii) requires that while computing income under the New Tax Regime, the taxpayer shall do so:
“Without set off of any loss—
(a) carried forward or depreciation from earlier years attributable to deductions not permitted under the new regime; and
(b) under the head ‘Income from House Property’ with any other head of income.”
In simple terms, any loss arising under the head “House Property” cannot be adjusted against salary, business income, capital gains or income from other sources if the taxpayer has opted for the New Tax Regime.
Interest on Home Loan: Self-Occupied vs Let-Out Property
There is often confusion regarding the treatment of home loan interest.
Self-Occupied Property (SOP)
Under the New Tax Regime:
- Deduction for interest under Section 24(b) in respect of a self-occupied property is not available.
- Since the annual value of a self-occupied property is nil, the interest deduction that ordinarily creates a house property loss is also unavailable.
Accordingly, taxpayers cannot claim the benefit of interest on a self-occupied house while computing taxable income under the new regime.
Let-Out Property
For a let-out property:
- Interest on borrowed capital continues to be considered while computing income from house property.
- However, if such computation results in a loss, the loss cannot be set off against any other head of income under Section 115BAC(2)(ii).
This is a significant departure from the old regime and catches many taxpayers by surprise.
No Carry Forward of House Property Loss
The restriction does not end with the current year’s computation.
Section 115BAC(3) expressly provides that:
The loss and depreciation referred to in Section 115BAC(2)(ii) shall be deemed to have been given full effect and no further deduction shall be allowed in any subsequent year.
This means that house property loss which could not be adjusted because of Section 115BAC cannot be carried forward for future years.
Position Under the Old Tax Regime
The position under the old regime is considerably different.
A taxpayer can:
- Compute income from house property after claiming eligible interest deduction.
- Set off house property loss against income under other heads during the same year, subject to the statutory limit of ₹2 lakh.
- Carry forward the unabsorbed balance for eight assessment years, where it can be adjusted against future income from house property.
Comparison: Old Regime vs New Regime
| Particulars | Old Tax Regime | New Tax Regime (Section 115BAC) |
| Set-off of House Property Loss against Salary/Business Income | Allowed up to ₹2 lakh | Not Allowed |
| Carry Forward of Unabsorbed House Property Loss | Allowed for 8 years | Not Allowed |
| Interest deduction creating House Property Loss | Available as per law | Loss cannot be used for inter-head adjustment |
| Benefit of accumulated house property loss | Available | Deemed to have been fully absorbed; no future deduction |
Illustration
Suppose a taxpayer has:
- Salary Income: ₹18,00,000
- Rental Income: ₹3,00,000
- Interest on Home Loan (Let-Out Property): ₹5,50,000
Old Tax Regime
House Property Loss = ₹2,50,000
- ₹2,00,000 can be adjusted against salary income.
- Remaining ₹50,000 can be carried forward.
New Tax Regime
House Property Loss = ₹2,50,000
- No adjustment against salary income is permitted.
- No carry forward is available.
- The taxpayer pays tax on the entire salary income without any benefit from the house property loss.
Why This Matters
Many taxpayers compare only the slab rates while choosing between the old and new tax regimes. However, taxpayers having:
- large home loan interest,
- rental properties generating losses,
- recently purchased investment properties, or
- substantial housing finance costs,
may lose a significant tax benefit if they opt for the New Tax Regime.
Therefore, the choice between the two regimes should not be based solely on lower tax rates. The impact of disallowance of house property loss set-off and the prohibition on carrying forward such losses can materially alter the overall tax liability.
Key Takeaways
- Section 115BAC(2)(ii) prohibits set-off of house property loss against any other head of income under the New Tax Regime.
- This restriction applies even where the loss arises due to interest on a let-out property.
- Section 115BAC(3) further provides that such loss is deemed to have been fully given effect, thereby eliminating any possibility of carry forward.
- Under the Old Tax Regime, taxpayers continue to enjoy inter-head set-off of up to ₹2 lakh and carry forward of the balance loss for eight assessment years.
- Taxpayers with substantial home loan interest should carefully evaluate both tax regimes before exercising their option, as the hidden cost of losing house property loss benefits may outweigh the benefit of lower slab rates.
