Published Editorial

Tax implications of buying second house with a loan

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Financial Express

By

Surabhi Marwah
Tax partner, EY

Contributed by:

Sachin Hans
Senior Tax Professional, EY

Buying a second house financed with a bank loan can be an attractive investment. However, before you proceed, here are a few tax implications that you must consider.

If an individual holds more than one property in his name, only one such property may be considered as self-occupied and the others are classified as ‘deemed rented out’ for the year under consideration. The deduction available on account of mortgage interest for a self-occupied property is limited to R2 lakh per year.

However, if the property is not acquired/constructed within three years from the end of the financial year in which the loan was taken, the interest benefit would be reduced to R30,000 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 (up 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 house 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 R2-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 R2 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 home 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 and 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 R1.5 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 house qualifies as ‘wealth’ on which wealth tax is levied at 1% of value if the net wealth exceeds R30 lakh.

Views expressed are personal.