Buying a house is a dream which only a few can realise. And then there are investors who manage to buy a second home as well. One may buy a second house for various reasons. Some people buy a second home away from their place of residence to relax and rejuvenate; some may set it up as a post-retirement recreational home or farmhouse. It can also work up as an investment option for some to enjoy the benefits of rental income and capital appreciation.
Whatever your intent may be, there are tax implications when you buy a second home. Take a look at tax implications you may face if you invest in a second property for the Assessment Year 2019-2020.
When You Buy a Second Home
- The first property is considered self-occupied, while the second home is ‘deemed rented out’ even if it is not given out on rent
- Income from self-occupied property is considered NIL. For rented or ‘deemed rented out’ property, the actual rent amount or an estimated rental value based on market rates is calculated for income tax purposes
- When both houses are rented, rental income from both properties will be taken into account for income tax purposes
- When property and loan are on joint names, then rental income too is divided on the basis of share of each co-owner
How To Calculate Income Or Loss From Property
If you have let out one of the properties or both properties on rent, then you need to calculate income or loss from property for computing your taxable income. Income or loss from property is computed after deducting municipality tax, standard deduction of 30 per cent and interest paid from the rental income.
For example, you earn Rs. 1,20,000 as rental income (or estimated rental value on ‘deemed rented out’ property), pay municipality tax of Rs. 2000, and interest of Rs. 80,000, then your income/loss from property will be calculated as — 1,20,000 – 2000 – 36,000 – 80,000 = Rs. 2000
What Are The Tax Implications On Home Loan Principal Component?
First home (self-occupied): In case you have bought the home through a loan, you can claim tax deduction of up to a maximum of Rs. 1.5 lakh on principal repayment on home loan under Section 80 C.
First Home Rented Or Deemed To Be Rented Out: If the owner is staying in a different city for work, only then can he claim tax deduction up to a maximum of Rs. 1.5 lakh on principal payment for first home rented or deemed to be rented out under Section 80 C.
Second home or additional property: No tax benefit available
Tax Implications On Interest Paid?
First home: You can claim tax exemption benefit up to a maximum of Rs. 2 lakh but only if the construction of the house is completed within five years from the end of financial year in which the loan is taken, otherwise, the exemption limit is Rs. 30,000. You can further claim an exemption of Rs. 50,000 on interest paid for loans up to Rs. 35 lakh given the total cost of the house is not more than Rs. 50 lakh.
Second Home Or Additional Properties: You can claim exemption on interest on second home or additional properties on an amount which is lower of Rs. 2 lakh or actual interest paid for all properties owned by the taxpayer.
A second home can become a tax burden considering there is a limit of Rs. 2 lakh on interest paid, and rental income on it will be taken into account for tax purposes even if it is not rented out.
Hence, it is wise to assess the tax implications and then make the move of buying a second home.
The writer is CEO, BankBazaar.com.