Second-time lucky?
PROPERTY AND TAX
A second home is more like an investment which will create an additional source of regular income in the form of rentals and will in turn have tax implications. Bindu Gopal Rao examines the tax benefits available for the second home buyer.
So have you have finished paying off the EMI of your housing loan? Great news, but there’s a small catch. While you had your loan, a good part of your taxes was getting saved, but post the loan, the tax element has gone up. This obviously means that your take-home salary gets hit.
So, how about buying a second home? Is that a viable idea at all?
Explains Sanjeev Aundhe, COO, Fire Luxur Developers Pvt Ltd, “With the increase in disposable incomes and tax benefits available, the real estate sector continues to attract interest from customers across all income brackets.
Many customers employed in IT/ITES sector, with large disposable incomes or being double income families, are looking at buying a second home which will not only bring them tax benefits but also offer them an option better than their current home, especially in the suburbs of cities like Bangalore.”
An investment option
A second home is more like an investment which will create an additional stream of regular income in the form of rentals and that would in turn have a tax implication. The individual can select any one of his homes as a self-occupied property. The annual value of a self-occupied property is deemed to be nil and thus, exempt from tax. However, the interest expenditure allowable as deduction in case of a self-occupied property is restricted to Rs 150,000.
A second home qualifies as a deemed let out property in case it is not actually let out during the year. “Interest paid on capital borrowed for purchase of a house is allowed as a deduction when computing the income chargeable to tax under the head ‘Income from House Property’. There is no cap on deductibility of interest expenditure in case of a let out, or for that matter, even a deemed let out property,” says Robin Roy, Associate Director, PricewaterhouseCoopers.
Currently the law allows set-off of losses under the head house property, against any other income i.e. business/profession income, capital gains, salary or income from other sources. Interest expense on the housing loan, which could be a substantial portion of the EMI in the initial years of the housing loan, could result in huge tax savings for tax-payers. The domestic law allows a tax payer to invest gains on sale of long term capital asset (other than a house property) in a house property and claim exemption. By availing this exemption, a tax payer can save upto 20% tax on capital gains otherwise chargeable to tax.
Standard deduction
Vineet Agarwal, Associate Director, KPMG adds, “a standard deduction of 30% of annual value is available in case of a second home which is treated as let out/deemed to be let out. This standard deduction is deductible from the gross annual value. If you are a salaried individual, your employer can factor in the loss from house property while computing your tax liability.
Hence, the income/loss from the second home may also be reported to the employer.” Opines Anil Rego, CEO & Founder Right Horizons, “any property tax paid towards the property is also allowed for deduction (which is not allowed on self – occupied property). If one were to avail a home loan, then the interest and principal part would qualify for tax benefit. Interest needs to be claimed u/s 24 as loss from house property without any limit, this will be net – off rental income after above mentioned deductions; the principal would qualify u/s 80C as deduction which has an overall limit of Rs one lakh.”
Says Anil Jain, LLB, CA, Anil Jain & Associates, “if an individual earns long-term capital gains from the sale of any capital asset other than a residential house property say from the sale of commercial property, land, jewellery shares of unlisted companies etc, then he can save tax on the capital gain so earned by availing the benefit provided under section 54 of the Income Tax Act by investing the sale proceeds in the purchase/construction of a second residential house.”
The purchase of the new house should be made within one year before or two years after the date when capital gains are accrued to him. Instead of buying the new house he can get the house constructed within a period of three years from the date of earning capital gains.
Purchase or construction of the second house should be only of a residential house and not a commercial property. The individual should not (within a period of one year or three years as applicable for purchase or construction of house) purchase another house i.e. no investment should be made in that period into another residential house that is the third house.
Further the individual should not sell the second house within a period of one year from the date of purchase or three years from the date of its construction as the case may be. If the amount of capital gain remains unutilised before the due date of filing return of income as applicable to the individual such unutilised amount should be deposited in a bank in a capital gains scheme account.
What to keep in mind...
While making the investment, one needs to evaluate the same in terms of location accessibility, financial viability, rental yield and capital appreciation. A second house property, which is not let out or let out for less than 10 months, or to be precise for less than 300 days, would qualify as a taxable asset under the provisions of the Wealth Tax Act.
The same would attract wealth tax at 1% annually. Likewise the sale of house property would qualify for long term capital gains taxation at a concessional rate, in case the property is held for more than three years. Where the let out property was vacant during the whole or part of the year and owing to such vacancy the actual rent received is lower than the notional rent determined under the law, then, such lower amount of actual rent would be chargeable to tax. Says A Shyamsunder, CEO, Disha Direct Marketing Services Pvt. Ltd., “the tax benefits on a second home are the same as that of a first home. The Income Tax Act does not discriminate between th first and second home.
However the tax benefits are only available for constructed property and not on open plots. Therefore, construction is important as far as second homes are concerned. Tax benefits on construction are the deduction on interest and principal repayments as is available for regular city properties.”
On the presumption that the second home is funded with a home loan, usually the highest tax paying category of people i.e. tax payers falling under the 30% tax bracket category, would benefit the most from a second home.
Here’s an example. Say A earns Rs 2,000,000 during the year from salary. His income-tax liability would be as under:
Income from salary:
Rs 2,000,000
Income from property
(house) - Nil
Gross total income:
Rs 2,000,000
Less: Deduction u/s 80C
Rs 100,000
Total taxable income:
Rs 1,900,000
Tax on Rs 160,000 - Nil
Tax on the Rs 160,000 to
Rs 500,000 bracket:
Rs 34,000
Tax on the Rs 500,000 to
Rs 800,000 bracket:
Rs 60,000
Tax on the Rs 800,000 to
Rs 1,900,000 bracket:
Rs 330,000
Total: Rs 424,000
Add: Education cess at
3% Rs 12,720
Total tax payable:
Rs 436,720
Now, say A purchased a second property for Rs 10,000,000 for which he avails a bank loan of Rs 8,000,000. The interest expenditure aggregates to Rs 600,000 in the first year and the principal repayment component is in excess of Rs 100,000. The computation of income in this case would be as under:
Income from salary:
Rs 2,000,000
Income from house
property:
Gross annual value
(assumed): Rs 300,000
Less: Standard deduction
@ 30% Rs 90,000 and
Interest:
Rs 600,000
Total: 390,000
Gross total income
Rs 1,610,000
Less: Deduction u/s 80C
Rs 100,000
Total taxable income
Rs 1,510,000
Tax on Rs 160,000: Nil
Tax on the Rs 160,000 to
Rs 500,000 bracket:
Rs 34,000
Tax on Rs 500,000 to the
Rs 800,000 bracket:
Rs 60,000
Tax on the Rs 800,000
to the Rs 1,510,000 bracket:
Rs 213,000
Rs 307,000
Add: Education cess at
3% Rs 9,210
Total tax payable:
Rs 316,210
Thus, A saves Rs 120,510 in taxes by investing in a second house even after assuming that he earned Rs 300,000 as rent income. The saving of Rs 120,000 of income-tax is attributable to the loss from house property of Rs 390,000 multiplied by the tax rate of 30%. In case the property buyer falls in a lower tax bracket (20% or 10%), his corresponding savings would be lower. If you are looking at investing in a second home go ahead – the time is now.
