Exemption on interest
In
the case of a home loan taken for a self-occupied property, the
principal amount repaid up to Rs 1 lakh qualifies for deduction under
Section 80C, while up to Rs 1.5 lakh of interest paid is tax-deductible under Section 24B.
However,
in the case of a home loan for the second property, only interest
payment is eligible for deduction. No tax benefit is available on the
principal repayment of the second loan. However, the good part is that
there is no limit on the deduction for interest payment on the second
loan. This is because the second house has been given out on rent.
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In
case the house is yet to be constructed, 20% of the total interest paid
during the preconstruction period is also allowed as the tax deduction.
This is available for five years from the time the construction is
complete till you get possession.
Deductions allowed on income from second home
Even
if the second house is lying vacant, the Income Tax Department will
consider that it has a rental value. The notional or deemed income (see
How income is computed) will be added to your taxable income.
Sonu
Iyer, tax partner, Ernst & Young, says, "A buyer can deduct
expenses, such as municipal or property taxes actually paid, from the
deemed income. Other than this, 30% of the net annual value, which is
the difference between the rental income and municipal taxes, is also
allowed as deduction. In case the house is rented out, 30% of the actual
rent can be deducted from the taxable income, apart from deductions for
local and municipal taxes."
After
deducting such expenses from the income that you earn from the
property, if you incur a loss, you have the option to set it off as
follows:
The current year's loss will first be set off against any other income from the property.
.
It can also be set off against other incomes, such as that from salary,
business or profession, and capital gains, earned in the current year.
.
If your balance continues to be in the red, you can carry forward the
loss for up to eight years. However, the amount that is carried forward
is only allowed to be set off against the income that is earned from a
house.
How to save on taxes
If
you own several houses, you can choose one as your primary residence.
The income from this property will be treated as nil and exempt from
tax, even if you have actually rented it out. It is for this house that
the limit of Rs 1.5 lakh applies for deduction on loan interest.
The
entire interest on the loan taken for the other house, the income from
which is taxable, can be deducted from your income. This applies to any
number of nonexempt houses that you may own.
So,
to maximizes your savings, consider the house with the highest loan as
the non-exempt one. However, make sure that the interest payment on this
loan is higher than the principal-cum-interest payment on the other
loan.
Additionally,
if you give your second house on rent for more than 300 days in a year,
it will not be subject to wealth tax, which is levied at the rate of 1%
on wealth that is in excess of Rs 30 lakh.
If
any of the houses is sold after three years, the profit will be taxable
as long-term capital gains. However, there are beneficial provisions
under which this gain is exempt from tax. So if you invest the money to
construct a house within three years or buy another house within two
years, your income will be tax-exempt.
However,
the exemption is reversed and the amount taxed as capital gain if the
new property is sold within three years of being constructed/purchased.
This
will be considered a short-term gain and taxed according to your slab
rates. You can also save tax if you invest the profit in a special bank
account under the capital gain account scheme. A similar exemption is
available for investments of up to Rs 50 lakh in bonds, which are
redeemable after three years. This investment should be made within six
months of the sale.
