CA Umesh Sharma
Arjuna (Fictional Character): Krishna, Recently Reserve Bank has reduced the Repo Rate leading to reduction in the Rate of Housing Loan. It may be easier for the Taxpayer to purchase a House now. Further due to recession in real estate, its good time to invest in house property. What are the possible benefits and drawbacks associated with the purchase of a new house in the Income Tax Act, 1961?
Krishna (Fictional Character): Arjuna, on the 15th of January, 2015 the Reserve Bank reduced the Bank Repo Rate by 25 basis point. Repo Rate means the rate at which the Reserve Bank gives loans to other banks. These banks will also reduce the Interest rate on their housing loan. In the real life it is essential to own a house. Thus the Income Tax Department has given the appropriate facilities for an individual’s first house. So, understand the Income Tax provisions related to “House” so that no problems arise in the future.
Arjuna: Krishna, In Income Tax how is the income from House Property liable to Tax?
Krishna: Arjuna, In the Income Tax there are five heads of Income, amongst them “Income from House Property” is one. Under this head, rental income from an immovable Property like a house, flat, warehouse, Plots, etc. comes under this head of Income. There are two types of “Houses” in “Income from House Property”:
1) Self-occupied House Property: According to Income Tax Act, taxpayer does not have to pay taxes on self-occupied property. Further if a loan has been taken for purchasing such a House then from F. Y. 2014-15, deduction of interest on such a loan up to Rs. 2,00,000 is allowed. This means the interest deduction can be availed against any heads of Income, so that less tax will be levied. Also deduction of Interest on pre-construction loans can be availed in five years in equal installments after completion of construction the said house. The deduction of Interest up to Rs.30,000 can be availed on loans taken for repairs and maintenance of houses. Thus taxpayer may stay happier with One House in Income Tax and in Real life.
2) Rented Property: According to the Income Tax, if taxpayers have a House and it is let out then the income of Rent shall be taxable. Deduction of Municipal Taxes shall be allowed from the said Income if such Municipal Tax is paid by the taxpayer. Standard Deduction of 30% of remaining income is available even though the expenditure is not met by the Taxpayer. Then the taxable income will arise after taking deduction of Interest on the Loans taken for such a House.
Arjuna: Krishna, what are the Provisions in Income Tax Act, when a Taxpayer already owns a house and again Purchases another house i.e., “Second House”?
Krishna: Arjuna, listen carefully; otherwise having a second house may become a hardship. E.g. If the Taxpayer is having a House at Aurangabad and he purchases another Flat at Mumbai, then he has to show any one property as Self Occupied Property and has to pay taxes on second House. Meaning, Income from the second House is considered as Taxable Income which will be according to the market rates of rent. Irrespective of the fact that the second House is being Let out or not, it will be deemed as let out by the Income Tax Department. This means, it is not at all easy to have a second “House”. The Method of levying taxes even though the Income is not generated is appalling. Also the second House is liable for Wealth Tax.
Arjuna: Krishna, is there any Exemption in Capital Gains on the Purchase of New House?
Krishna: Arjuna, According to section 54 of Income Tax, if the Taxpayer has sold a three years old residential property and purchased a new Residential Property then Exemption can be availed and the tax can be saved. According to section 54F of Income Tax if Taxpayer sells Capital Assets like a Plot, Shop, House etc. other than Residential House and Purchased one Residential Property then he can avail Exemption. That means Income Tax is giving more emphasis on a single Residential Property only. This means that from the F.Y. 2014-15 there is no deduction on second House. I.e., Only One house can be purchased or build up to save capital gains.
Arjuna: Krishna, What are other Deductions available to Taxpayer other than this? What are the provisions if there is loss from this source of Income?
Krishna: Arjuna, According to section 80 C of Income Tax, if the Taxpayer has taken Housing loan and in the financial year principal amount of it is repaid then deduction up to Rs. 1.5 Lakhs can be availed. If loss is incurred under this source of Income then according to section 71 of Income Tax, this loss can be adjusted in the income from any source. E.g. if any taxpayer has incurred a loss of Rs. 1 lakh in “Income from House Property” and the Taxpayer receives a salary of Rs.6 lakh then he has to pay Taxes only on Rs. 5 lakhs. According to section 71 B the set off of loss can be carried forward up to 8 years against “Income from House Property”. Again the set off of loss can be availed even though the Income Tax return is not filed before the due date.
Arjuna: Krishna, What one should learn from the Income Tax on “Second House”?
Krishna: Arjuna, it is very difficult to manage “Second House” in the presence of a previous house. In Income Tax, Second House is taxable whether the income is generated on it or not. This means, a human faces many difficulties in Income Tax and in Real Life if he is has a Second House. Taxpayers invest in Properties for Long Term Investment purpose but they themselves should not get trapped in it. This means, in Life one must do “Family Planning” and “Tax Planning” very carefully.
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I have a residential property in Mumbai and have bought another property in the same city. Both the houses are on joint name…… I would like to understand the tax implications.
Dear sir,
I own a flat in Tnagar, inerited portion of an independant house in anna nagar,chennai. I am selling the portion house of anna nagar and may get 1.5 crores as proceeds. Indexation will not be of help as the property was allotted one by housing board in 1977, If i invest rs.60 lakhs for purchase of another residential property, whether this amount will be exempted from capital gains? If i invest the balance amount in exemption bonds for rs.50 lakhs, will it be exempted from capital gains. Total cap gain will be around 1.3 crores only
v.m.perumal
Sir,
Very good article deserves commendation. A person (at 58 years/retirement) bought a commercial property from his capital gain. Is there any tribunal / court judgement to uphold his exemption from capital gain. Kindly reply.
I have one house, built with my own salary and earnings (loan from employer). Last Month my wife got a flat as a gift from my father in law and got registeres as so. She is an IT assesse as a reired teacher. In other words, each of us have one house each and have filed ITRs upto 31-03-2014 and assessed.
Please gide for the AY 2015-16
Prashanth: There is no exemption for purchasing only site.
I have a house which is self occupied and now i have recently purchased plot by taking housing loan. please suggest me if i can take IT benefit for purchase of plot. Construction is planned after 4-5 years
Regards
Prashanth
I have a self occupied residential house. Now I have got share in my father’s house under Will/Mutation on his death. Please advise if I can claim tax exemption under section 54 from long term capital gain tax on sale of my father’s house if I fully invest capital gain to buy another single residential house while i am already owning a residential house.
I have a house in my name with my wife as joint owner. Now if my wife purchases another flat in her name, will it be counted as second house in her name as per IT Act?
– M.SHARMA
ms3sharma@gmail.com
I have owned house self occupied & second house has been given at rent.Loan taken from Office for second house & first already cleared loan.Self is service man. I want to know whether income tax is liable or not how it can calculated. Pl reply email as follow.
Sir I have purchased a shop on loan. Can I claim for interest u/s 24b.And also can I claim for principal u/s. 80c.
Thak you for posting a good article on tax liabilty on housing property.
We have one house in the name of my wife. Another plot in her name near our house has garrage for car. What will be tax liability for the garrage(not attached with the house)?
Mr.Babu Balakrishnan: You have two houses but housing loan is for one house only. Regardng thst house, you can claim deductions u/s 24B and 80-C. Regarding the other house which is self occupied, you cannot get any exemption towards house rent u/s 10. If you are getting HRA that is fully taxable. This article is, as is evident by the contents, deals with capaital gain in respect of purchaze of 2nd house.
There are two question, what should be the rent income should show if property not let out ? We can go for only Municipal Rateble value for that ?
And second question is that What will be the rent consideration for if I am having 3 open plot each of under 500 meters and 3 shops which are also vacant ? One should consider rent on both in their computation ?
I have selected wrong Financial year while filling form26QB, Now form16B is available for download.How can I get financial year / Assessment year get corrected in these forms ?please advise.
In my opinion deduction u/s 54F would be available against long term capital gain from sale of Plot, shares etc. on purchase/construction of one house even if the assessee owns one house already. The amendment brought is to restrict claim of deduction on purchase/construction of multiple units simultaneously. Expert views of other professionals welcome. Thanks
I have two houses,One at Chennai and another one at Chandigarh. I am working at Chandigarh and occupying this Chandigarh House. My family is occupying second house at Chennai because they are living there. I have a Housing loan for Chennai House , Can I avail the rebate for interest and Principal repayment under section 80 C , Both houses are self occupied and no Income from house property.
Kindly advise.
Babu Balakrishnan
Hi,
Thanks for the detailed article.
Please specify about taxable second home in same city or anywhere in India?
If one buy home in native place or in a city he works or have frequent visit for business than is it treated same way?
Thanks.
Dear Sir,
01. Can we get benefit of HOME LOAN interest U/c. 24 & Principal amount U/s. 80c on purchase of second house.
02. Suppose we sold 1st home & purchase of another home, then can we availed benefit of section 24 & 80c, like above.
Pls. Explain.
Thanks
Devendra Sharma
If you lift the corporate veil, the intention of this statutory exemption is to ensure the basic necessity of residence to the citizens. In other words, owning more than one house is an apparent commercial motive, and hence, cannot have tax relief but for the magnanimity and mercy of the assessment Officers hitherto, who viewed the word — “a residential…” as all residential houses instead of “one”