A "low interest" loan shouldn't mean you have very little interest in paying it back!
In 2008, Rashi Verma, a human resource executive at an automobile firm, applied for a home loan to purchase a house in Mysore, Karnataka. The loan amount was INR 12 lacs for a tenure of 10 years. Nevertheless, four years later, Ms. Verma got a better employment offer from Bangalore and moved to the city. What made her different from other new girls in the city was that she decided to buy another property in Bangalore rather than going for a rental place. She also couldn’t bear to sell the first home she ever bought too. Everyone was baffled as she was already paying EMI for a home loan. But this time she took a loan for a 30-year tenure with a lower EMI. The Mysore house was leased out, which took care of EMIs of that house. And voila! When the taxes were computed, she could see some unforeseen benefits, which will be explained below. The sentimental decision turned to be a blessing, indeed!
However, it is essential for a buyer planning to purchase a second house to fathom the tax inferences specified in the Indian Income Tax Act of 1961 as well as the current Union Budget for owning and keeping the second property.
Verma epitomizes the recent trend of buying more than one home is booming. Many buys properties like this to rent out as an added investment. Some even keep the second house as a holiday home. Purchases of second homes has escalated considerably in the last five years. In some metro cities and small towns on the path to metro-stature, the real estate market is getting crazier by the day. These days it is not rare for builders and prospective buyers to engage in bidding wars in sought-after destinations close to cities.
There are a slew of tax benefits for those who own two houses. But there will not be any such perk if you have already repaid your home loan completely. Now let us take a look at those benefits in detail.
a. Self-Occupying the Second Home: If you have more than one residential property for your use, then as clearly specified in the Income Tax Act provisions, one of the two houses as per your pick will be deemed as self-occupied and its yearly value is calculated to be zero. The other place will be considered as a let-out and a speculative rent according to the provisions, which will be taxed under the heading, ‘Income from House Property’.
b. Examining he Tax Implications of the Vacant Property: If you are owners of more than one ‘Self Occupied Properties’ (SOP), you can choose to treat one of the two as SOP. The remaining house(s) will be considered ‘Deemed Let-Out Property’ (DLOP) as mentioned in the Act. If one of your house is a DLOP, it is viewed as a rental property. Hence, a notional rental value will be added to the taxable income. You can claim a flat rebate of 30 percent for maintenances and general upkeeps.
c. Using the Second Home as a Vacation/ Retirement Retreat: As the perk of self-occupied asset can be availed only for one residence, the assessed yearly rent will be regarded as the taxable value.
d. Letting/ Leasing out the Second House: If your second home is bought to rented or leased, the real rent you earn will be taken as taxable income, conditional on certain guidelines.
e. Deducting for Municipal Taxes: The taxes disbursed to the local authority, mostly the municipal taxes, are permitted as deduction in a fiscal, wherein such taxes are complied. This is regardless of whether these taxes relate to the present fiscal or the year before.
f. Deducting For The Purpose Of Maintenance, Repairing and Renovation: Moreover, an amount akin to 30 percent of the yearly appreciated value of the home is permitted. This is because a certain amount has to be deducted for renovation, general upkeep and other repairs. It is important to note that this 30 percent deduction is a set percentage rather than in accordance with the individual expenses. No matter how much you have spent, you can only claim this 30 percent and not more.
g. Deducting the Interest: Whether your second property is considered to be let-out or essentially let-out, the real interest disbursed on the home loan is permitted as deduction. This is contradictory compared to the case of a self-occupied home, in which the maximum interest on home loan is limited to INR 1.5 lacs per annum (INR 2 lacs from AY 2015-2016), bound by certain conditions.
Are you wondering whether you should make an offer for your second home in this fizzing market? It will probably become a solid investment or a home where you will spend your golden years. it won’t do to get cocky over your experience in home buying. Real estate is an ever-evolving market and trends and prices changes are always dramatic and drastic.
There are a few pointers to remember before buying your second house:
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