Whether for long-term capital growth, rental revenue, or personal use, purchasing a second home is an alluring choice for many purchasers. A second property has many tax benefits under the Indian Income Tax Act in addition to the financial ones. Let’s examine in more detail how investing in a second home might help you take advantage of tax advantages.
1. Home Loan Interest Tax Deductions
Section 24(b) of the Income Tax Act allows you to deduct taxes on interest paid when you buy a second house using a loan. The use of the property determines how much you can deduct:
- Self-Occupied Property: You are eligible to deduct up to ₹2 lakh in interest payments annually if your second residence is self-occupied.
- Let-Out Property: There is no cap on the total interest amount that can be deducted if the property is rented out. However, there is a cap of ₹2 lakh each fiscal year on the total loss from home property that can be deducted from other sources of income.
2. Deductions for Principal Repayment
You can also deduct the principal repayment of your house loan under Section 80C. As part of the entire ₹1.5 lakh limit under Section 80C, the maximum deduction permitted is ₹1.5 lakh annually. Deductions for other qualified investments, such as PPF, EPF, and ELSS, are included in this.
3. The Effect of Taxes on Rental Income
Your second property’s revenue is subject to taxation under the heading “Income from House Property” if you decide to rent it out. The taxable income can be decreased by:
- Withholding Municipal Taxes: You may subtract from your rental revenue any municipal taxes you pay on the property.
- Claiming Standard Deduction: Regardless of the actual costs paid, repairs and maintenance are eligible for a standard deduction of 30% of the property’s yearly worth.
- Interest Deduction: There is no cap on the total amount of interest that can be deducted from home loan payments.
4. Capital Gains Tax on Second-Party Property Sales
Capital gains tax will need to be taken into consideration when you sell your second property:
- Short-Term Capital Gains (STCG): These gains are taxable at 30% and are deemed short-term if the property is sold within two years after purchase.
- Long-Term Capital Gains (LTCG): Gains are taxed at 20% and are regarded as long-term if the property is kept for more than two years. Indexation is also a benefit.
- Exemption Under Section 54: If you reinvest the capital gains from the sale in another residential property, you may be eligible for an exemption from LTCG tax.
5. New Tax Laws That Help Second Homeowners
The Indian government recently enacted tax reforms that can help investors in second homes:
- Raised Tax-Free Income Threshold: As a result of the recent tax reforms, second-home investors now have more money available for investments as the income threshold has been raised to ₹12 lakh.
- Tax Relief on Second Homes: Homeowners who own multiple residences can now take advantage of tax exemptions granted by the government on two self-occupied houses.
Conclusion
There are several financial advantages to owning a second property, including the possibility of tax savings and appreciation. You can optimise the tax benefits of your second property and make better judgements if you are aware of the available deductions and exemptions. To be sure you’re taking full advantage of these advantages and adhering to the most recent rules, it’s always a good idea to speak with a tax expert.