CA Sandeep Kanoi
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.
However, it is important for an individual, who is planning to buy a second home, to understand the tax implications under the Income-Tax Act 1961 of owning and maintaining the second home.
Second House is 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.
Even vacant house has tax implications
If you own more than one Self Occupied Properties (SOP), you have a choice to treat any one of the properties as SOP. The other such property (ies) which lies vacant will be treated as Deemed Let Out Property (DLOP) under the Act. If a property is treated as a DLOP, it is effectively put at par with a let out property as far as taxation is concerned. Hence, a notional rental value (method to calculate such value prescribed under the Act) is considered as the gross taxable rent for such property. You are allowed to claim a flat deduction of 30% for repairs and maintenance charges.
Second home is used as a holiday home
As the benefit of self-occupied property is available for only one home, the estimated annual rent will be considered as the taxable value.
Second House is 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.
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. ( 2 Lakh from AY 2015-16), subject to certain conditions.
WEALTH TAX ACT, 1957
a) Under the Wealth tax Act, 1957, Section 5(1) indicates that an assessee can hold one property as a self occupied property and the same be exempt from eligible assets liable to Wealth tax.
b) If an assessee, holds more than one property, then the second property for the purpose of Wealth tax has to be valued as per the Wealth Tax Rules 1958 and the value in excess of Rs. 30,00,000/- is liable to Wealth tax. However if there is any liability against the said asset, the same is to be deducted before computing the taxable wealth.
c) If the assessee holds more than one property and the second property as let out for more than 300 days in previous year, then such property is not considered as eligible asset for calculation of taxable wealth.