New Delhi: Traditionally, buying property in India has been seen as a good long term investment as it offers tax benefits, capital appreciation and rental income. For these reasons, many people in India buy more than one house. Typically, people finance these home purchases through a home loan. If you’ve bought more than one property with a home loan, you can get a tax break on the second property as well. In this way, you can claim tax advantages for the second or more home ownership in accordance with the latest income tax rules.
It is worth mentioning here that from the 2019-2020 fiscal year, the income tax rules for tax benefits for the second property have changed. However, the tax benefit depends on whether the second property is self-employed or rented out.
If the property of the second house is occupied:
If a person owns two homes and neither of them is rented, both properties are treated as owner-occupied, and the gross annual value for income tax return (ITR) purposes is assumed to be the NIL under Section 23 of the Income Tax Law of 1961. It means that notional rent is not taxed. “However, prior to fiscal 2019-20, the notional rent for the second property was taxable,” said Balwant Jain, tax and investment expert.
In such a case, if you have a home loan for both properties, the total deduction of the home loan interest from both properties is a maximum of Rs 2 lakh, and the main repayment of the home loan up to Rs 1.50 lakh can be deducted in accordance with Section 80C of the IT- Law.
In the case of owner-occupied properties, additional income that remains after deduction of Rs 2 lakh can neither be carried forward nor adjusted against other income.
If the second house is rented:
If the second property is rented for rent in the previous financial year, the rent actually received / to be received is taxable as the gross annual value. However, some deductions may be made in relation to the property being rented. How to calculate the taxable value of rental properties:
1. Determination of the gross annual value (GAV) of the property: In the case of a rented property, the rent collected on the property is considered the GAV.
2. Reduce property tax: Property tax is permitted as a deduction from the GAV of the property.
3. Determine the annual net value (NAV): The annual net value is calculated as GAV less property tax
4. Reduce the standard deduction: 30% of the net asset value is allowed as a deduction from the costs for the repair and maintenance of the property according to § 24 EStG.
5. Reduce Home Loan Interest: Deduct the total rental interest. The resulting value is your home income. This is taxed according to the individual’s income tax plate.
Treatment of losses from home ownership for taxation
In the case of owner-occupied residential property, the use of the deduction of home loan interest leads to a loss on residential property, as the gross annual value is zero. According to the Income Tax Act, the maximum loss of Rs 2 lakh from all owner-occupied properties can be adjusted against the income of other heads.
However, for rented or deemed rented properties, there is no such cap on the deduction of home loan interest deductions.
“For rented property, if the net annual value after all home loan interest is deducted turns out to be negative, such losses can be offset against the income from another income that year at Rs 2 lakh. The remaining loss can be carried forward to the next 8 valuation years. However, that loss can only be offset against future home ownership income, ”Jain said.