The Union budget 2017 has severely curbed the tax benefit on the interest paid on housing loans in case of properties that are rented out or are 'deemed let-out'. The budget proposes to restrict the loss on house property that can be deducted from 'other heads of income' such as 'salary income' to Rs 2 lakh only, says EY. Currently there is no limit on the amount of this loss that can be set off against other heads of income.Normally, interest paid on housing loan is eligible for the following tax benefit: In case of a house which is rented or 'deemed rented', 30% of the rental income (standard deduction) plus municipal tax paid on the house and interest paid on the loan taken for that house are allowed as deductions. After these deductions, often the rental income becomes zero or negative and is called 'loss from house property' in the latter case. Such loss is currently allowed to be set off against other heads of income such as salary without any limit. This arrangement currently allows the tax payer to substantially save on his total income tax payable on rental income as well as total income.The budget proposals aim to limit the amount of this 'loss from house property' to Rs 2 lakh per annum for rented houses and 'deemed to be let-out' houses. This move would limit the amount of interest a person pays on his home loan that he can claim as a set off (in case of 'rented/deemed to be rented' house) thereby effectively reducing the tax benefit he gets from interest paid on home loan. However, the unadjusted loss from house property can be carried forward for 8 assessment years but can only be set off against income from house property.This move is aimed at bringing parity between the tax benefit allowed on 'self occupied' property with property that is 'rented or deemed rented' in terms of the loss on house property. Those with self occupied property, are currently allowed to claim interest paid upto Rs 2 lakh on home loan as a deduction from other heads of income such as salary income or income from other sources (e.g interest income from bank FDs etc). Therefore the deduction they can claim on interest paid on home loan is already limited to Rs 2 lakh.An example of the loss in tax benefit that would be suffered due to this proposal is shown in the table below.An individual receiving a rental income of Rs 35,000 per month and paying a housing loan interest of Rs 10 lakh per annum would have to pay tax on additional income of Rs 5.13 lakh. Therefore, such an individual in the 30% tax bracket would have to shell out additional tax of Rs 1.59 lakh assuming the person's taxable income is below Rs 50 lakh, says EY. Refer table below.