Time was when we bought a home because we needed to. Now, people buy a home as an investment. Real estate, after all, is one of the most preferred modes of real estate. As India continues its economic upsurge, more and more people are considering buying a second home. The country’s strong growth in real estate coupled with a conducive interest rate regime has encouraged investors to consider investing in a second home.
But owning a second home comes with its own tax implications. So, while you celebrate the addition of another asset in your kitty, understanding the tax consequences of owning a second home financed by the home loan is equally important.
According to tax laws, when you own more than one home, only one is considered as self-occupied, and the rest are deemed to be let out. The treatment of self-occupied property and let out properties is quite different. Let’s see how.
Which one of the homes is considered self-occupied?
A home is considered as self-occupied if:
- The property is occupied by the owner
- The property is not let out
- No benefit is derived from that property
Even if none of the properties is occupied by the owner, he can consider any one of them as self-occupied. All other properties are deemed to be let out.
Tax treatment on the principal amount for a second home loan
On a self-occupied property, the principal amount repaid up to Rs 1,00,000 can be considered as deduction under Sec 80C of the Income Tax. However, on the second home loan, no deduction on principal is available.
Tax treatment on interest repaid on the second home loan
When it comes to interest on home loans, your self-occupied property qualifies for a deduction of up to Rs 1.5 lakh under Section 24. The entire amount of interest repaid on second/subsequent home loans was allowed to be set off as a loss against income from house property till the last financial year. However the Union Budget of 2017-18 has proposed to cap that interest deduction at Rs 2 lakh. Any loss over and above Rs 2 lakh is allowed to be carried forward as a set off against income from house property for the next eight years.
Tax treatment of income from second/subsequent homes
Any properties other than the one self occupied are considered to let out, even if they aren’t actually let out. If the properties are not let out, the owner would need to consider a fair market value as rent received. He can deduct municipal/property taxes paid from the rent so received. A further deduction of 30% is allowed as standard deduction.
The amount derived after these deductions is added to the income of the person and taxed according to his/her slab. If there is a home loan on this property, interest paid on the same up to a ceiling of Rs 2lakh* (FY 2017-18 onwards) is allowed to be deducted from the income arrived at. A simple table below will help you understand the tax implications better.
Also, a second home is considered as wealth and is subject to wealth tax of 1% over an amount of Rs 30 lakh.
As you see from the working due to the cap on interest repayment, the tax outgo of a person increases.
