Income Tax on Multiple Property Ownership

Tax planning done?
Smart financial planning begins with your Credit Score!

Check your
FREE Credit Score

Check your
FREE Credit Score

The real estate sector has been among the most preferred investment avenues for a large number of people in the country. The almost assured appreciation of value over a period of time, coupled with the option for recurring income through rent or simply as a second home for vacationing make multiple property ownership a lucrative deal for majority of investors with surplus income. Investors should however ascertain the tax implications of such a move as half knowledge can potentially cost them additional taxes. The Income Tax Act, 1961 outlines the tax impact of owning more than one property in India.

Taxability of Second and Subsequent Homes:

The IT Act, 1961 states that if a person owns multiple house properties, then one of these properties will be considered to be a self-occupied property. Consequently, the remaining properties are considered to be rented out by the IT department and as such the owner has to pay taxes on the fair rental value of the property. This fair rental value is calculated as the expected rent from a similar property lying in the neighbourhood.

The house that the property owner chooses as self-occupied property is at his discretion and can be changed to a different property in every assessment year. Another tax implication here is that if the self-occupied house was bought through a home loan, then the owner is eligible for Rs.2 lakh tax deduction on interest per year. The pre-construction interest paid up to Rs.2 lakh per year on home loans can be claimed as tax deduction if the property is self-occupied. In case of joint property ownerships, the person(s) actually paying the home loan instalments will be eligible for the deductions.

The rest of the properties are taxed according to the higher amount between rent received and the fair rental value of the property, irrespective of whether they have been rented out or are occupied by the family members of the owner. The owner may claim the paid municipal taxes as tax deductions for these properties. If the other properties are bought on home loans, the interests paid may be claimed as tax deductions with no upper limit.

Taxability of Subsequent Properties used for Commercial Purposes:

In case the second property or any of the subsequent property has been rented as a commercial property, the taxation becomes complicated and have to be taken on a case to case basis. If the property rent received cannot be removed from other asset incomes, then the whole property will be taxed as income from different sources or as profits and gains of business.

In case the property rent received can be distinguished from the income from other assets within the property, then the property will be taxed normally on the actual rent paid. You should ensure you know about taxability in light of the different criteria mentioned in this article.

Claimable Deductions:

The following tax deductions can be claimed on multiple properties:

Standard Deduction: 30% of the yearly value of the property is provided as flat deduction for purposes like house insurance, maintenance and repair of property etc., and can be claimed without proving if expenses are made for said reasons.

Deductions on Municipal Taxes: Municipal taxes paid on a property can be claimed as tax deductions.

Housing Loan Interest: Interest paid on housing loans are exempt from taxes as specified earlier in the article.