By Ms. Surabhi Marwah, EY
Buying a second home financed with a bank loan can be an attractive
investment.
However, before you proceed, here
are a few income tax implications that you must consider.
If an individual holds more than one property in his/her name, only one
such property may be considered as self-occupied & the others are
classified as ‘deemed rented out’ for the year under consideration.
 |
| Surabhi Marwah, EY |
The deduction available on account of mortgage interest for a
self-occupied property is limited to Rs. 2 lakh per year.
However, if the property is not acquired / constructed within 3 years
from the end of the financial year in which the loan was taken, the interest
benefit would be reduced to Rs. 30,000 only.
The interest set - off is in addition to the deduction for municipal
taxes and a 30 % standard deduction allowed while calculating income under the
head ‘House Property’.
Though the benefit of the interest offset is available starting from the
year in which construction is completed, the interest paid prior to such year
is also allowed in five equal annual instalments beginning from such year.
In addition, Section 80C of the Income Tax Act allows you a deduction
(ups. to R1.5 lakh per year) when you
make principal repayments on loans borrowed for construction / acquisition of a
residential house.
Such claim of deduction is, however, subject to the condition that the
property is held for a minimum five years from the end of the year in which
possession is obtained.
Taxability under different scenarios
(1). One home is rented out, another used for residence. Rental income
received from the let-out property is taxable and interest paid on a loan taken
for such a property is fully deducted (without the Rs. 2-lakh cap) against such
income. The other property, being self-occupied, will have NIL income, but
interest deduction on the corresponding home loan, if any, is limited to Rs. 2
lakh.
(2). Both houses are rented out. In this case, the respective rental
income from the two properties is taxable and a full deduction of interest paid
on the corresponding housing loans is allowed against such incomes.
(3). None of the houses is rented out Since the law allows only one house
to be considered as self-occupied, the second house is considered ‘deemed
rented out’ for the year under consideration and the fair market value of
rentals will be considered taxable in respect of such house. The property to be
classified as deemed rented out is at the individual’s discretion.
In case of joint ownership and / or home loans taken in joint names,
rental income may be computed & deductions for interest / principal
repayments may be availed corresponding to the percentage share of each
co-owner.
It is pertinent to note that although the deduction on account of
principal repayments is capped at Rs. 1.5 lakh under Section 80C, the interest
portion paid on ‘rented out’ or / ‘deemed rented out’ properties is allowed
without any cap.
Further, any loss computed under the head ‘House Property’ is allowed to
be set off against your taxable income.
Also, a second home qualifies as ‘wealth’ on which wealth tax is levied
at 1 % of value if the net wealth exceeds Rs. 30 lakh.
About the author.
The author Ms. Surabhi Marwah is tax partner with EY. Sachin Hans, senior
tax professional, EY, contributed to this article.
No comments:
Post a Comment