Buying a second house? Be aware of tax rules on rental income
If you plan to lease out your second house on a full-time or regular basis, knowing how the income will be taxed allows you to strategize in advance and maximize post-tax returns.
How rental income is taxed In India, second-home income in the form of rental income is charged under the head "Income from house property." The rent you receive, less the municipal taxes actually paid, is the net annual value (NAV). From the NAV, you are entitled to a general deduction of 30% for maintenance and repairs, irrespective of your actual outlay. The residual amount is added to your overall taxable income and charged at your respective slab rate.
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Notional rental income on an unoccupied second home If your second home is empty, the Income Tax Department may treat it as "deemed to be let out" anyway. When this occurs, notional rent — what you could have potentially earned — is calculated and taxed, even though you receive no actual rent. This rule applies unless the second home is under construction or you can reasonably assert that it be used for particular personal purposes like housing dependent parents.
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Home loan interest deductions If you have taken a home loan on your second house, you can deduct the interest paid under Section 24(b) of the Income Tax Act. In the case of a self-occupied house for which the deduction is ₹2 lakh per year, there is no restriction on interest deductions for a let-out house. This means that you might be able to offset much of your rental income and reduce your overall tax liability.
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TDS on rent paid to landlord If your tenant is a person or HUF who pays rent of more than ₹50,000 per month, he/she must deduct 5% tax at source (TDS) under Section 194-IB while paying the rent to you. You have to deposit TDS to the government and credit the same in your Form 26AS. It's important to track TDS credits so that you get full credit when you file your income tax return.
Capital gains when selling the second home If you are selling your second house after holding it for more than 24 months, the gain is a long-term capital gain (LTCG), taxed at 20% with indexation benefit. The short-term gains from selling within 24 months are taxed according to your slab rate. You can claim exemptions under Section 54 or 54EC by investing the gains in another residential property or notified bonds within the respective time limits.
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Advance tax liabilities If your net tax liability on rent income (and other income) exceeds ₹10,000 in a financial year, you must pay advance tax in instalments. Failure to do so may attract interest under Section 234B and 234C. Anticipating your rental income and tax liability at the start of the year can allow you to make payments and avoid penalties.
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GST applicability on renting Your second residence leased out for residential use is not liable for GST. But leasing it out for commercial use can attract GST at 18%. This makes a difference if you want to lease it out as office space or for short-term stays through Airbnb, based on how the property is categorised.
