With investment in real estate on the rise these are aspects that need to be kept in mind

Now, more than ever before, we are venturing out to purchase a second house and such an occasion of purchase of house is always a great moment in one’s life. Typically, we purchase a second house for various reasons such as investment, holiday home, earning rental income. Investment in real estate occupies a significant share of an individual’s portfolio, hence, tax implications on this front should be considered. In this article, direct tax implications on purchase of second house in India is outlined below

The taxpayers (i.e.owners) may let out the second house and earn rental income. In such cases, the taxpayers would be subject to income-tax on the rental income. The computation of such rental income is outlined below by way of an illustration:


Particulars
Amount (in Rs)
Actual rent (per annum)
1200000
Actual rent considered as gross annual value
1200000
Less: Property taxes paid to local authority
50000
Net annual value
1150000
Less: Deductions under section 24 of the income-tax, 1961
      a)    30% of net annual value

      b)   Interest on load (presumed)


3,45,000

4,00,000
Income from house property
405000


Note to above table: Actual rent is presumed to be more than (a) fair rent (rent, a similar property in same locality would fetch), (b) municipal value and (c) standard rent (as per Rent Act)

In case the taxpayer owns more than one house which is used by him, then for income-tax purposes, one house is considered as self-occupied property. The annual value of such self-occupied property is considered as “Nil”. The other houses owned by the tax payers are considered as deemed to be letout and subject to income-tax on a notional value. The computation of income from such house (which is treated as deemed to be let-out) is outlined below by way of an illustration:

Considering House 2 as self-occupied property would lead to savings in income tax as value of House 2 is higher:

It is pertinent to note the following:

  • The taxpayer can exercise the option of which house is to be considered as deemed to be letout in case both the houses are actually used by the taxpayers.

  • It is not necessary for the second house to be actually letout but still is considered as being letout for income-tax purposes and rental income estimated in such cases.

Interest on home loan obtained for purchase of second house is deductible while computing the income from house property. Such interest can be claimed as a deduction irrespective can be claimed as a deduction irrespective of the fact whether the house is letout or self-occupied. In case of letout or deemed to be letout house property, the entire interest on home loan is allowable as deduction while in case of self-occupied house property, interest deduction is allowable up to Rs 2 lakhs per annum.

One house is exempt for wealth tax purposes and in respect of the additional houses owned, such taxpayer is liable to pay wealth tax. Hence, the tax payer would be subject to wealth tax on the second house owned by him. It is pertinent to note that in the following cases, the second house is not liable to wealth tax:

  • Farm house which is located beyond 25 kilometres from the local limits of any municipality

  • Residential property let-out for more than 300 days in the relevant financial year.


Particulars
House 1
(in Rs.)
House 2
(in Rs.)
Gross annual value
1200000
2000000
Less: Property taxes paid to local authority
50000
75000
Net annual value
1150000
1925000
Less: Deductions under section 24 of the income-tax Act, 1961
           a)   30% of net annual value
3,45,000
5,77,500
Income from house property
805000
1347500
Status
Deemed to be let out
Self-occupied


Note to the adjacent table: Gross annual value is presumed to be higher of fair rent or municipal value and capped up to standard rent