Know the tax implications of second house
Are you planning to buy a second house? While you need to happy that you are adding another asset in your portfolio, you also need to do lots of home work. While you need to check your expenses and the long term payment obligations that would get created from this transaction, it is equally important to understand tax implication of the second house that you decide to buy. Let us understand certain concepts before we get a feel of what is the tax implication of second house that you decided to buy.
Self Occupied Property:
As per Section 23(2)(a), a house property shall be termed as self occupied property where such property or part thereof:
- Is in occupation for the owner for the purpose of his own residence
- Is not actually let out during the whole or part of previous year; and
- The owner does not derive the any other benefit from the house
It is upto the owner to decide which house is self occupied if he has two property and the property decided as self occupied must fulfill the criteria as mentioned above. However, there may be certain exceptions here which need not be overlooked.
Let out Property
The property which is not self occupied is assumed to be let out. So if a person has five properties, one will be considered as self occupied and remaining four become let out property.
Now let us understand the tax treatment of first house as well as the second house that you have decided to buy. In case of a home loan taken for a self occupied property, the principal amount repaid up to 1 lakh qualifies for deduction under Section 80C; while up to 1.5 lakhs of interest paid is tax-deductible under Section 24. This benefit gets reduced for second house. For the second house only the interest payment is eligible for deduction but there is no cap here as 1.5 lakhs. This means that if you are paying 3 lakhs as the interest entire amount is eligible for tax deduction subject to a formula prescribed.
In case of second house if the house is yet to be constructed, 20% of the total interest paid during the pre-construction period is also allowed as tax deduction. There is a limit however here which means that this benefit on pre –construction house is available for five years.
Tax benefits from second house:
Suppose you are staying in Mumbai and you buy your second house at Patna. It is obvious that the second house will not be used by you and there is also a likelihood that the house remains vacant and is not put on rent. In a different scenario, let us imagine that you have given the house to your parents for staying and you are not getting any rent.
In order to understand what is the tax benefit of the second house, which is a let out house let us imagine the scenario given below. Suppose you earn Rs.1.5 lakhs on second house as rental after adjusting municipal taxes. So the annual value of property is taken as Rs.1.5lakhs. A standard deduction at the rate of 30% is allowed on let out property. So this works out to be Rs.45000 and you are paying Rs.1.4 lakhs as interest on the loan taken for second house. So the total income from house property will be considered as ( a-(b+c)) as given in the example below.
|Second house is let out property|
|a) Rental Income ( Annual Value)||Rs. 150000 per annum|
|b) Standard Deduction @30%||Rs. 45000|
|c) Interest paid on home loan||Rs. 140000|
|d) Income from House property||-35000|
The negative income from second house is shown as loss from house property and you can reduce this amount from your taxable income. In case an employer does not allow you to adjust loss, you can claim tax benefit while filing tax returns.
Is it always beneficial to buy second house from taxation perspective?
The answer is no. There are two scenarios in which you do not get real benefits. Scenario one is when you have paid your home loan and hence there is no interest that is paid on second home. Two, when the interest paid and standard deduction is less than annual value you do not get any tax benefit on second house. Also another point that you need to remember is that a second house qualifies as 'wealth' on which wealth tax at 1% of value is levied if net wealth exceeds Rs 30 lakhs.