Your Holiday House Can Save Taxes for you and How?

By Mr. Vineet Agarwal,  KPMG   

After working for many years, there is always a desire to lead a relaxed second innings of life.

Many aspire to own a holiday house located in a destination of choice.

Some people tend to overlook that this dream can actually manifest into a tax-friendly investment and could also offer steady rental income and capital appreciation.

In an ideal scenario, once an individual is able to build his primary house, the next step is always to identify investment avenues to park the savings. These savings over the years give shape to retirement dreams.

 

Vineet Agarwal,  KPMG.

A second house is also referred as a holiday home by some people basis their dreams of making it. Similar to the concept of owning two flats / apartments where one house is used for self residence and other is let-out, a holiday home when not occupied during vacations can be rented. From the rentals earned you are entitled to claim deduction for municipal taxes paid during the year.

You shall also be allowed a standard deduction of 30 per cent under the Income-tax Act, 1961 (‘IT Act’). This deduction is intended to cover the general repairs and maintenance expenses that you would incur while earning the said income.

If you intend to fund your holiday home by way of a housing loan, then in addition to the standard deduction, you shall be allowed a deduction for interest on home loan paid during the year and only the remaining income would be offered to tax. If the net amount after claiming deductions in a loss, then this can be adjusted against other taxable incomes.

Of course, if the house remains fully vacant, the expected annual rent would need to be offered to tax.

The current house in which you are residing is generally referred as self occupied property. The rental value is considered as nil and a deduction of interest up to Rs. 1,50,000 is allowed.

The principal amount in both cases can be taken as a deduction under section 80 C of the IT Act subject to a maximum of Rs. 1,00,000.

If you are nearing retirement, you can invest in your holiday home by selling the primary home. The IT Act provides exemption under section 54 whereby the proceeds from such long-term capital gains can be used in investing in a second house.

To claim the exemption, the capital gains must be invested in a house within one year before or two years after the due date of transfer of the house sold. Many people plan to buy their holiday homes abroad. There have been many case laws to support the view that tax exemption under section 54 of the IT Act can be availed on investing in a house abroad.

So, if you are you thinking of buying your dream holiday home in the Himalayas or the beaches of Goa, a little tax planning at early stage of your life can help you in making your retirement an enjoyable experience.

The writer Vineet Agarwal is director at  KPMG. The views expressed are personal

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