Tax Benefits for Let-Out Properties Under New Regime: An Analysis of Available Incentives and Unaddressed Gaps

India's New Tax Regime: Navigating the Rules and Gaps for Let-Out Property Owners

Taxpayers who earn rent from a let-out property can still claim some deductions under the new tax regime, but there are limits on how losses can be used compared to the old tax regime. The new rules have introduced a distinction between self-occupied property (SOP) and let-out property, with interest on borrowed capital continuing to be allowable for let-out properties.

Under the new tax regime, a taxpayer earning income from a let-out property is eligible to claim deductions in respect of such property, including the standard deduction of 30 percent of the Net Annual Value and interest on borrowed capital. However, the set-off of loss under the head "Income from House Property" against income under other heads is not allowed, although such unabsorbed loss may be carried forward for set-off against income from house property in subsequent years.

Key Deductions and Limitations

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Tax authorities are keeping a closer watch on let-out property owners, particularly those who may be using the new tax regime to aggressively plan their taxes. Sudhir Kaushik, a tax expert, notes that there is no limit on how much interest can be claimed for a rented property, and this can lead to aggressive tax planning if not properly monitored.

One concern is that taxpayers may show their self-occupied house as rented, even if the rent is not real or involves relatives, to take advantage of interest tax benefits. This can lead to disputes and legal issues, as determining whether the declared rent reflects market value can be subjective.

Another long-standing issue is under-reporting of rental income, which can be more beneficial to taxpayers if reported as business income. This can reduce taxable income further than house property rules, which is why some taxpayers prefer it.

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Enforcement and Scrutiny

The focus has now shifted from changing the law to improving enforcement. With increasing reliance on data analytics, cross-verification of financial transactions, and scrutiny of high-risk cases, the tax department is better equipped than ever to detect inconsistencies. For taxpayers, this means that while legitimate tax planning remains possible, the margin for aggressive structuring is narrowing.