Our jobs or needs require us to move to a different city or town, away from our own. So naturally instead of leaving our hometown completely, we choose to own another house at the place of work.
In some cases, one builds an additional house to earn extra income from renting it out.
The addition of a second house to your assets is a good investment, however, you need to understand the tax implications it will have before you do, especially with a home loan.
Before you find out the tax implications, here are some basic concepts of owning house property in India as per the law.
House property rules as per Indian tax laws
- If you own more than one house, only one is considered as self-occupied. A self-occupied house property means: it is occupied by the owner for the purpose his own residence; it was not actually let out in the previous year and that the owner does not derive the any other benefit from the house.
- You can decide which house will be your self-occupied property. It does not have to be the first one you buy.
- Suppose you buy another house and do not let it out, it is still considered as rented out by default.
- A second house is considered as wealth, which means that if your net worth of wealth exceeds Rs 30 lakhs, a 1% tax will be applicable on it.
- You can own as many houses or property as you can. There is no limit on it.
As for the home loans that you have taken for your houses, consider the following.
Tax implications on principal repaid
- If you are still repaying the loan amount on your first house, the actual principal repaid is eligible for investment exemption under section 80C to a maximum of Rs 1.5 lakhs (Rs 2 lakhs for senior citizens).
- If you have only one house but you have rented it out or left it vacant because you had to move to a different city, you can still avail the tax exemptions for section 80C stated above.
- You can avail this tax benefit on partial or full repayment of loan too.
- If clubbed with with the overall tax limit of exemptions on tax saving investments under Section 80C, you can claim the exemption upto Rs 50,985.
- You do not have any tax exemptions on principal repaid in case of second or additional house/ property or a house that is under construction.
Tax implications on interest paid
In case of self-occupied house, if your house construction has been completed within 5 years from when the loan was taken, a maximum of Rs 2 lakhs can be exempt from the actual interest paid (Rs 3 lakhs for senior citizens).
On an under construction property, you can claim exemption on interest paid over five financial years in 5 equal parts after the completion of the house, but it has to be within the Rs 2 lakhs limit.
If the house was not completed in 5 years, Rs 30,000 is your maximum exemption.
You can avail an additional exemption of upto Rs 50,000 on loans upto Rs 35 lakhs, where the house the cost of house was upto Rs 50 lakhs.
Interest paid on your second or additional houses are exempt to a limit of upto Rs 2 lakhs.
Tax implications on income from rent earned
Income from rent is taxable. If you haven't rented out your additional property, the fair market value will be considered as rent.