Tax Implications of Purchasing or Renting Second Property

Real estate investment is always alluring. Besides the appreciation in value, it protects your capital from downside. The low home loan interest rates also encourage you to buy a second property. 

As your income rises, you think of investing in a second home. The second home may be in your own city or somewhere in the hill stations where you can relax and enjoy. Although finances may not be a concern, many individuals take a home loan to purchase a second property to ensure that all property documents are verified. The tax benefits on repayment of a home loan are an added advantage. The home loan EMI calculator helps you to calculate EMIs over the tenure of the loan based on different interest rates, home loan amount and time periods. 

What would be the Tax on purchasing/Renting a second property?

Here, we highlight some of the tax implications of owning and renting your second house property.

  • If both properties are self-occupied or remain unoccupied

You may wish to live in one property and leave the other as vacant for your use whenever required. Simply put, you may decide not to rent out the properties.

In that case, the taxable income from both the properties will be considered as NIL. The Indian Income Tax Act allows an individual to consider any 2 properties as self-occupied. No income will be attributable to these 2 properties unless they are rented out.

Additionally, suppose either of the properties is acquired by taking a home loan. In that case, the individual can take a tax benefit on payment of principal and interest at the applicable home loan interest rates. For instance, repayment of the principal amount is deductible from your total taxable income (total income from all sources) up to Rs. 150,000 under section 80C. Further, interest on loan for every financial year is deductible up to Rs. 200,000 every year under section 24. This deduction reduces your aggregate income from other sources (salary, business income, interest, dividend etc.).

The pocket-friendly home loan interest rates and the tax benefits on payment of interest offer dual advantage of taking a home for acquiring a second home. 

  • If one of the properties is rented

It is quite likely that you may live in one house and rent out the other property. In that case, the income from the self-occupied property will be considered as NIL. For the rented property, the actual rent earned on the property would be considered as taxable income.

You would be entitled to the following deductions from income from rented property:

  1.     Municipal tax paid;
  2.     Standard deduction of 30% of the gross income from rented property; and
  3.     Actual interest, calculated at the applicable home loan interest rates, on a home loan taken for the second property, without the outer limit of Rs. 200,000 mentioned above.

Additionally, you would be entitled to the benefit of deduction of Rs. 150,000 under section 80C on the principal amount of the loan repaid.

  • If both the properties are rented

You may be living with your parents and renting out both the properties. Then, the actual rent from both the properties will be taxable for you. You would be entitled to the deductions for municipal tax, standard deduction and actual interest payment from the rental income offered to tax. This would be in addition to the deduction of Rs. 150,000 under section 80C.

It is important to note here that the deduction under section 80C may already be saturated by PPF contribution, life insurance premium and tuition fees of your children. In that case, there may not be a considerable amount of tax benefit available on the principal amount of home loan repaid.

The attractive home loan interest rates have motivated many young adults to acquire more than property and rent them out. Mindful of the financial commitments, these individuals use the home loan EMI calculator to calculate the future EMIs over the tenure of the home loan. 

Final words

To let out the property or not is your own decision. Whatever may be the decision, you can gain from the multiple tax benefits on income from house property. Taking a home loan further adds to the benefits you can claim.

The home loan EMI calculator calculates your EMI over the tenure of the loan. It helps you ascertain your financial commitment over a period of time and arrange your finances accordingly.