Know your Capital Gain on Income from House Property

7 December 2009

Shelter is one of the basic human needs and buying
a house is generally every household’s dream.
These days, keeping in view the rise in income
 levels, households also look at the option of
investing in more than one house property.

People buy a second home for many reasons,
 which, Capital Gains Binter-alia, include
 as an investment for capital appreciation;
 to use it as a holiday home; to get a regular
stream of income by way of rentals;
or to diversify their investment portfolio.

Whatever be the reason, an important aspect to
be considered at the planning stage is the tax
implication of owning and maintaining the second home.

Second House — Self-Occupied

If an individual owns more than one house property
for his use, then under the provisions of the Income
Tax Act, 1961 (the ‘Act’), any one property as per
 his choice is treated as self-occupied and its
annual value is computed to be nil. The other house
 property is deemed to be let-out and a notional rent
as per the provisions of the Act is computed as the
taxable income under the head ‘Income from House Property’.
 In other words, the second house is treated as being
 rented-out and its estimated rental income is treated as taxable income.

Second House — Let-Out

If the second house is let-out to a tenant, the actual
rent received, subject to certain conditions,
is treated as the taxable income under
the head ‘Income from House Property’.

Deduction for Municipal Taxes

The taxes paid to the local authority, generally the
 municipal taxes, are allowed as deduction in the
financial year, in which such taxes are actually paid.
 This is irrespective of whether these taxes pertain
 to the current financial year or the earlier year.
Therefore, an individual should keep a track of the
municipal taxes paid and claim this deduction accordingly.

Deduction for Repair & Maintenance

Further, a sum equal to 30% of the annual value of the
 house property is allowed as deduction towards repair
and maintenance charges. It is pertinent to note that
this deduction of 30% is a fixed percentage, irrespective
 of the actual amount incurred by the individual
i.e., irrespective whether an individual incurs more
or less amount, he can only claim a deduction
for 30% of the annual value of the house property.

Interest Deduction

Interestingly, in both the above scenarios, i.e., whether
 the second house property is deemed to be let-out or
 actually let-out, the actual interest paid on the
housing loan is allowed as deduction.

This is contrary to the case of a
self-occupied property, wherein the
maximum interest on housing loan is restricted
to Rs 150,000 p.a., subject to certain conditions.

Hence, investment in house property even if it
is a second house, does have its own tax benefits.
 If one is lucky enough to own more than one house
property then s/he can avail of tax benefits mentioned
above, in respect to the second house.