1. Keeping with convention, on 1st February 2019, the standing Finance Minister presented an interim budget with minimal tax proposals allaying rumours that the Government shall present a full budget before the ensuing general elections. Though the main tax proposals have been left for the regular budget, importance of certainty at the beginning of the year for middle class, salary earners, pensioners and senior citizens has led to (and justifiably so) minor yet far reaching changes to income-tax provisions.

2. One particular passage from Finance Minister’s budget speech which gives an insight into the tax proposals presented in the interim budget is:

5. We are moving towards realising a ‘New India’ by 2022, when we celebrate 75 years of India’s independence: … where everybody would have a house …”

The Housing for All by 2022, launched in June 2015 with an aim to provide affordable housing to urban poor is a flagship project of the Government concerning the problem of urban housing. In its final budget, this Government has made one more attempt in furthering its policies.

3. In all, there are eight clauses in the Finance Bill, 2019 which seek to amend the Income-tax Act, 1961 (the “Act”). Clauses 4, 5 and 6 deal with the tax proposals connected with immovable properties. While Clauses 4 and 5 deal with tax on notional rent and deduction of interest therefrom, Clause 6 deals with exemption from capital gains on sale of house property.

Clause 4 of Finance Bill – Tax on Notional Rent

4. As per the existing provisions, a house owner could treat one house as her self-occupied property on which no income-tax would be levied. Income-tax on notional rent is currently payable if one has more than one self-occupied house. Section 23(4) of the Act which restricts the exemption from levy of tax on notional rent to one house has been proposed to be amended to extend the exemption to two houses.

5. The Government has realised the difficulties of the middle class having to maintain families at two locations on account of their job, children’s education, care of parents etc. and a proposal has been mooted to exempt levy of income-tax on notional rent on a second self-occupied house as well1. The reason stated for this proposal is laudable. But, it gives rise to certain issues. In a country where the problems of poverty and absence of owned houses is acute, the number of persons who really maintain two houses on account of their job, children’s education, care of parents etc., would be less. Considering the overall economic scenario of the country, ownership of more than one house is, even if not a sign of affluence, at least not a sign of belonging to the “middle class” for whom this proposal has been mooted. It is likely to benefit the “Have rather than the Have-not”.

6. Furthermore, the well-intentioned objective of aiding the middle class is not to be found in the language of the amendment. The replacement of “one” with “two” or “one house” with “two houses” in the existing language of Section 23(4) is de hors reference to the objective of the amendment. As a result of this, persons who own more than one house in the same city shall also be eligible for the benefit. The language of the proposed amendment is simple and clear. According to well- established principles of interpretation of taxing statutes, when the language of the section is clear and unambiguous, there is no scope for referring to external aids of interpretation such as the Finance Minister’s speech2. In these circumstances, persons owning more than one house, not on account of the exigencies set out in the Budget Speech or the like, but as a consequence of abundant/surplus resources shall also be eligible to avail the proposed benefit.

7. Upon this proposal being implemented, a typical Indian family comprising two adults and their minor child/ children can, with proper planning, own up to four houses without having to pay tax on notional rent on any of the houses.

8. Section 23(2) of the Act contains the grounds on which the annual value of a house is treated as nil. Amending this provision to specify circumstances in which annual value of a second house could be treated as nil would have been more in line with the legislative intent. Considering the aggressive nature of income-tax authorities in India, it cannot be ruled out that the income-tax authorities would rely on the Budget Speech to read something which the language of the provision does not provide, leading to litigation on this issue. The proposal is likely to most benefit high net-worth individuals/ families and senior corporate executives rather than the middle class for which it has been mooted.

9. Another amendment proposed by Clause 4 is to grant more time to builders and developers for liquidating their inventory before tax on notional rent on the unsold inventory is levied. Houses which are unoccupied after getting completion certificates are subject to tax on notional rental income3. By Finance Act, 2017, builders and developers were granted time of one year from obtaining completion certificates up to which notional income would not be so taxed. By Clause 4, the time of one year is proposed to be increased to two years as a result of which notional rental income from unsold inventory of builders would not be taxed for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained. This amendment is expected to give impetus to the real estate sector4.

10. Our country faces a housing paradox. Despite acute shortage, more than 10% of total urban housing stock lies vacant5. Though the proposal is sure to bring respite to the real estate sector which has been experiencing sluggishness and slowing demand for some time now, it is important to focus on the problem by public policy interventions rather than only through ad hoc changes to tax laws. Despite recession in the real estate sector, prices have not shown significant corrections to match demand, at least in major cities. This shows that developers are more willing to hold onto prices rather than attempt to increase sales by reducing prices. In these circumstances, giving developers more time to liquidate their inventory will only be counterproductive in alleviation of India’s major urban problem of lack of affordable housing. One instance of public policy intervention was the introduction of the Real Estate (Regulation and Development) Act, 2016 which was one such step in the right direction for regulation and promotion of the real estate sector.

Clause 5 of Finance Bill – Deduction of interest on home loans

11. Clause 5 seeks to amend Section 24 of the Act to provide that the monetary limit of deduction on account of interest payable on borrowed capital shall continue to apply to the aggregate of the amounts of deduction in case of more than one self-occupied houses, which is currently two lakh rupees. Therefore, even though two houses may be treated as self-occupied and annual value of both the houses shall be treated as nil if the budget proposals are implemented, the deduction of interest or aggregate of interest on both houses shall be restricted to the current amount of two lakh rupees. Interest continues to be available as deduction on let out properties without any limit.

12. Therefore, e.g., if an assessee avails two loans for two different houses, both of which are treated as self-occupied under the amended Section 23 and the assessee pays two lakh rupees as interest on each of the two loans, the amount of deduction under Section 24 of the Act shall continue to be two lakh rupees. It is common for taxpayers to view home loans as a legitimate tax saving device as well. However, with no additional benefit on interest payments (as well as on principal repayment with no change in Section 80C limits), it does not make tax sense to avail a home loan on a second house for tax planning purposes unless interest payment of the first loan is not sufficient to exhaust the limit of two lakh rupees.

Clause 6 of Finance Bill – Tax Exemption on Sale of House

13. Clause 6 seeks to amend Section 54 of the Act so as to provide relief to taxpayers having long-term capital gains up to two crore rupees, arising from transfer of a residential house, by affording the assessee an opportunity to utilise the said amount for the purchase or construction of two residential houses.

14. Under the erstwhile provisions of Section 54 of the Act, capital gains arising to an individual/ HUF from transfer of a residential house (being a long-term capital asset) were exempt if the capital gains were invested in “a residential house” within a particular time. The expression “a residential house” was interpreted by Courts6 and Tribunals7 to mean multiple residential units. As a result, the exemption under Section 54 was available on investment in more than one residential house.

15. In the very first budget presented by the incumbent government, by Finance (No. 2) Act, 2014, an amendment was made to the provisions of Section 54 to provide that the benefit of exemption was available to investment made in one residential house. Now, in its last budget, the restriction in the number of houses has sought to be relaxed by proposing to provide exemption in case where capital gain is invested in two residential houses. However, such option is available only if the capital gain does not exceed two crore rupees. Furthermore, such option can be availed by an assessee only once in a lifetime. The capital gains, not utilized till filing of the return of income can be invested in capital gains deposit scheme and thereafter utilised for purchase/ construction of two houses.

16. Two provisos have been inserted below Section 54(1). However, the wording of the proviso is far from satisfactory. There could be a situation wherein, though an assessee purchases two houses but wants to restrict her exemption to one house only as the same is sufficient to cover the capital gain arising on the transaction. The language of the proviso suggests that even in this case, the assessee will be considered to have exercised the option proposed to be given by Finance Bill, 2019 and shall be disentitled to avail the option subsequently. E.g. an assessee earns capital gain of one crore rupees on sale of a house (X) and buys two houses – A and B – of one crore rupees each. Clearly, investment in any of the houses – A or B – is sufficient to exempt her tax liability on sale of X. The language of the proviso reads as follows: “the assessee, may at his option, purchase or construct two residential houses in India, and where such an option has been exercised the provisions shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted”. Thus, one can interpret this proviso to mean that the moment an assessee purchases/ constructs two residential houses (irrespective of actually availing the option of considering two houses for exemption), her once in a lifetime opportunity shall get utilized. A little rearrangement of expression “at his option” could have been useful in the present case for conveying the true intent. If the proviso would have read as follows: “the assessee may purchase or construct two residential houses in India, and where such an option has been exercised the provisions shall, at his option, have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted”. Had the proviso been worded in the manner suggested, then the assessee in the above example could have opted to not exercise the option and preserve it for future when actually needed. The placement of the words “at his option” in the place as currently envisaged in the proviso is likely to result in tremendous litigation and should be reviewed urgently.

17. Second proviso below Section 54(1) restricts this new exemption to once in a lifetime opportunity. As a result, both individuals and HUF can avail this benefit only once. Though the benefit of existing Section 54(1) i.e. exemption upon investment in one residential house in India shall continue to be available.

18. Though the Budget 2019 proposals pertaining to immovable properties may be well intentioned, two out of the three proposals are likely to increase tax litigation rather than reduce it. Additionally, the proposals are likely to be more beneficial for a class for which the proposals are not intended and may even be counterproductive.


1 Paragraph 91 of Budget Speech.

2 Refer: Anandji Haridas & Co. Pvt. Ltd. v. Engineering Mazdoor Sangh [1975] 99 ITR 592 (SC).

3 Refer: CIT v. Ansal Housing and Construction [2016] 389 ITR 373 (Delhi).

4 Paragraph 95 of Budget Speech.

5 Source: Census of India, 2011.

6 Refer: CIT v. Smt. V.R. Karpagam [2015] 373 ITR 127 (Mad.); CIT v. Gita Duggal [2013] 357 ITR 153 (Delhi); CIT v. Syed Ali Adil [2013] 352 ITR 418 (AP).

7 Refer: Nilesh Pravin Vora & Yatin Pravin Vora (Legal heirs of Pravin Laxmidas Vora) v. ITO [2016] 45 ITR (Trib.) 228 (Mum.).