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Tax implications of buying second property on loan
February, 17th 2015

Before fundING a second house purchase through a loan, it’s important to be aware of its tax implications. Even though such a borrowing would entail long-term repayment obligations, the benefits are dual — creation of an asset and tax benefits on the interest paid on the home loan.

If you are already staying in your own house — and buy a second one for residential purposes — such a property would be considered ‘deemed to be let out’, and tax would accrue on the notional income (as per prevailing market rent). Such taxability would trigger even where the second house is kept vacant. Where such a second house is actually let out, the actual rent (or the market rent, whichever is higher) would be taxable.

If you have let out your own house and are staying in a rented accommodation in another city where you are employed — and decide to buy this rented house or some other property in the city for your stay — such a house would be considered ‘self-occupied’. No additional income for this house would be considered taxable. Let us consider some examples.

Gayatri owns a house in Delhi. She buys another property in Goa as a holiday home. The house in Delhi would be considered ‘self-occupied’ whereas the one in Goa would be ‘deemed to be let out’. The market rent of such a holiday home would be taxable. Now, if Gayatri lets out the Goa property, the actual rent would be considered taxable income.

Let’s now assume that Gayatri does not own the Goa property (owns a house in Delhi that is let out), she is working in Bangalore and residing in a rented accommodation. She decides to buy this rented accommodation or some other house in Bangalore. The house in Bangalore would then be considered ‘self-occupied’ and the actual rent for the Delhi house would be taxable.

Deductions from income

No deduction is allowed for actual expenses incurred for repair and maintenance of the property. However, 30% of the net rent (rent less municipal taxes paid) is deductible. Further, interest on housing loan is also deductible under the law while computing income from the house.

An individual would be allowed a maximum deduction of R2 lakh for interest on housing loan payable for a ‘self-occupied’ property. For a let out/deemed-to-be-let-out property, the entire interest payable on housing loan is allowed as deduction. In addition, an individual is allowed deduction from the gross total income for principal repayment of home loan under Section 80C of the I-T Act, 1961 within the overall cap of R1.5 lakh.

Set-off and carry forward

You may incur a loss from a property in a year if the deduction availed is more than the income from it. Such a loss may be set off against other income, including salary income, in the same financial year. The balance loss can be carried forward for eight years and set off against income from the house.
Wealth tax

‘Wealth’ for the purpose of wealth tax law includes building or land appurtenant thereto. One house is exempt from wealth tax. Residential property let out for at least 300 days, property being used for business purpose or held as stock in trade are also exempt from wealth tax. Thus, unless the second residential house is let out, it may be subject to wealth tax.

Capital gains tax

If you have sold any other capital asset, such as gold, bullion, shares, etc., held for more than 36 months, subject to certain conditions, you may also save capital gains tax on such a transfer by investing the consideration towards purchase/construction of a residential house.

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