Let us Understand tax implications of second home
Some individuals do own second home or plan to own second home. Let us say some individuals are lucky or have worked hard enough to own a second home. Second home is purchased for the following purpose
- For investment
- For regular income in form of rent
- For diversification in the overall investment portfolio
- For holiday home, etc
Second home is an excellent asset to own. At the same time it is important to understand the tax advantages or disadvantages of owning a second home. The tax implications are very different based on whether the second home is self-occupied or rented out.
Self-Occupied Second Home
For the situation where an individual uses first and second homes for self, then any one of the home based on individual’s choice is considered as self-occupied. The other home is deemed or considered to be rented out, for taxation purpose. For this situation the following tax aspects are applicable.
- Notional Rental Income– A notional rental income, is considered as the income from the deemed rented out home. This notional income is added to total income of the individual for income tax computation
- Interest Cost Benefit– The interest paid per year, without any limit, on the housing loan for the deemed rented out home is allowed as deduction from the total income. This is different from the self-occupied home, where interest deduction is only limited to Rs 2 lakhs per year
For the situation where the second home is rented out, the following tax aspects are applicable
- Rental Income– The rent received is considered as income and added to total taxable income of an individual
- Property Taxes Benefit– The property or municipal taxes paid in a financial year are allowed as deduction from the rental income
- Repair & Maintenance Cost Benefit – 30% of the annual rental income is allowed as deduction from the rental income. As 30% of the annual rental income is considered as the annual home repair & maintenance cost. 30% of the annual rental income is fixed irrespective of the actual cost of home repair & maintenance cost
- Interest Cost Benefit – The interest paid per year, without any limit, on the housing loan for the rented out home is allowed as deduction from the total income. This is different from the self-occupied home, where interest deduction is only limited to Rs 2 lakhs per year
It is a myth or misunderstanding that interest on second home does not provide tax benefit. Rather it is opposite of that – interest on second home provide tax benefit on the complete interest amount, without restriction of Rs 2 lakhs limit per year.
If Assessee owns more than one house property & is kept for own use,
- one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
- Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above.
In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit. However, for the second house property, no deduction is available for repayment towards the principal portion of housing loan under section 80C.
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.
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 not always beneficial to buy second house from taxation perspective, because, 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.