Taxability of second House under the Income Tax Act,1961

People buy a second home for many reasons, which, inter-alia, include as an investment for capital appreciation; to use it as a holiday home; to get a regular stream of income by way of rentals; or to diversify their investment portfolio. Whatever be the reason, an important aspect to be considered at the planning stage is the tax implication of owning and maintaining the second home.

Second House — Self-Occupied

If an individual owns more than one house property for his use, then under the provisions of the Income Tax Act, 1961 (the ‘Act’), any one property as per his choice is treated as self-occupied and its annual value is computed to be nil. The other house property is deemed to be let-out and a notional rent as per the provisions of the Act is computed as the taxable income under the head ‘Income from House Property’. In other words, the second house is treated as being rented-out and its estimated rental income is treated as taxable income.

Second House — Let-Out

If the second house is let-out to a tenant, the actual rent received, subject to certain conditions, is treated as the taxable income under the head ‘Income from House Property’.

Deduction for Municipal Taxes

The taxes paid to the local authority, generally the municipal taxes, are allowed as deduction in the financial year, in which such taxes are actually paid. This is irrespective of whether these taxes pertain to the current financial year or the earlier year. Therefore, an individual should keep a track of the municipal taxes paid and claim this deduction accordingly.

Deduction for Repair & Maintenance

Further, a sum equal to 30% of the annual value of the house property is allowed as deduction towards repair and maintenance charges. It is pertinent to note that this deduction of 30% is a fixed percentage, irrespective of the actual amount incurred by the individual i.e., irrespective whether an individual incurs more or less amount, he can only claim a deduction for 30% of the annual value of the house property.

Interest Deduction

Interestingly, in both the above scenarios, i.e., whether the second house property is deemed to be let-out or actually let-out, the actual interest paid on the housing loan is allowed as deduction. This is contrary to the case of a self-occupied property, wherein the maximum interest on housing loan is restricted to Rs 150,000 p.a., subject to certain conditions.

Hence, investment in house property even if it is a second house, does have its own tax benefits. If one is lucky enough to own more than one house property then s/he can avail of tax benefits mentioned above, in respect to the second house.