Tax Implications on your Groovy Second Home

By | May 8, 2015


Humankind has spread its wings and made the moon its second home. While there are no tax implications of that (not yet at least!) there certainly are tax implications on your second home here on earth.

We unlock the tax dreadlock for you.

Tax implications for multiple properties

Before getting into the details of tax implications, here are some things that you must know as the owner of multiple properties:

  • In case of multiple properties, only one is considered as self-occupied and the others fall under the ‘deemed rented out’ category
  • Tax treatment for home loans differs on self-occupied and ‘deemed’ or rented out property

Tax treatment for homes: If you have taken up a home loan for a self-occupied property, the principal amount repaid up to 1.5 lakhs qualifies for tax deduction under Section 80C. Similarly an amount up to Rs. 2 lakhs is allowed as tax deduction on interest paid for the home loan.

Now, if you buy a second home through a housing loan, only the interest payment is eligible for deduction. The good thing is that there is no cap on the maximum limit. For example, even if you pay Rs. 3 Lakhs as interest amount for the financial year, the whole amount is liable for tax deduction.

Various scenarios with multiple properties

  • If second property is rented out: If the second home is rented out, you will need to pay tax on rent received from it. The municipal taxes, a standard flat deduction towards maintenance and any interest paid on home loan for the property is reduced from the rent received to reach the taxable amount.
  • If second home is self-occupied or vacant: You have the option to choose any one of your properties as self-occupied while the other one would be considered as rented. The flat considered as deemed to be let-out will be taxed on a notional rental income that it can generate after accounting for all deductions of taxation as above.


Property and Capital Gains Tax

If you sell an old or existing property, you would be eligible for long- or short-term capital gains tax. Selling any property within three years of acquisition attracts short term capital gain which is combined with your overall income. If you use the sale proceeds to buy a new house located in India within one year prior to or two years from the sale date of your older house you can avoid the entire long term capital gains tax outgo.

Tax relief available on a second home

Here is a look at tax relief available for second home owners.

  • Deduction for Municipal Taxes: All payments made towards any municipal charges like property tax or house tax can be claimed as deduction while calculating the final tax obligation due to the second home.
  • Flat Standard Deduction: A flat standard deduction of 30% from the annual value is allowed towards maintenance charges for the property. This deduction is available irrespective of whether you spend the money on maintenance each year or not.
  • Interest on Home Loan: If you have taken a home loan to purchase the second property you can avail tax deduction on interest paid towards home loan repayment. The maximum limit allowed for deduction is Rs. 2 Lakhs for self-occupied property and no upper limit for a second home.


Illustration of tax benefits from a second home

Suppose you have bought a second home and have given it on rent at Rs. 13,000 per month after purchasing the property through a home loan. The tax obligations you will have on the second house would be as follows:

  • Annual rent received: 13000*12: Rs. 1,56,000
  • Standard deduction @ 30%: Rs 45,000 (approx.)
  • Tax paid to municipal corporation: Rs. 2,000 (assume)
  • Interest paid on home loan: Rs 1,00,000 (assume)
  • Therefore, the overall income considered for the property =156,000 – 147,000 =Rs. 9,000

So, if you are a second home owner, or are looking to buy a second home for yourself, watch your tax outgo.

Unless you have bought yourself a luxury pad on the moon!

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