Buying multiple properties is a pride of a wealthy people and smart investors and then there are several reasons for it apart from having a diversified portfolio. Few buy it as an investment, to use it as a holiday or weekend home or to earn a rental income. However there is a cost attached to owning and maintaining it.
However it comes with its own tax benefits and liabilities and its crucial to understand both and make best use of it
When your second house is vacant :
If you own two or more properties, your second house is considered to be deemed as rented even if rarely used as a holiday home and its assumed that its fetching a notional rental income and becomes taxable income. However one can claim 30% as expense incurred towards maintenance and repairs of that particular property.
Taxes paid to municipal authorities as house tax can be deducted from the rental income earned.
Interest deduction :
In case second home is purchased by taking a home loan, actual interest paid can be deducted from taxable rental income over and above 30% repairs and maintenance.
In case of self occupied property, tax deduction is capped at 2,00,000 of interest paid.
If there are two owners and borrowers, both can use 2,00,000 deduction each or 50% each. (2,00,000 from AY 2015-16 on wards)
However there is no rebate on principal repayment in case of second home loan.
For example if a person pays 12,00,000 interest on a 1.4Cr loan , entire 12,00,000 can be claimed as deduction and assuming a person getting such a loan would fall in 30% income tax bracket, tax savings @ 30% of 12,00,000 will be 3,60,000 and hence the actual effective rate of interest of home loan will be approximately 4-5%.
Wealth tax Act , 1957
Under the wealth tax Act, an individual can own one property for self use and the same will not attract any wealth tax liability.
If an individual holds more than one property, then the second property is valued and the value in excess of Rs 30,00,000 attracts wealth tax liability. If there is any liability against the said asset, it would be deducted from final tax amount.
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