Saving tax on your second home
Whether or not you’re renting out your second property, you must pay tax. But the Income Tax Act does offer some flexibility. Here’s how to lower your tax liability on a second home.
Swift appreciation over the past decade has led many of us to buy a second home. If you’ve taken this step recently, the IT head ‘Income from House Property’ is perhaps new to you, as you don’t need to pay any income tax on the property you live in. So what are the tax implications of such a step and how can you lower your tax outgo?
What is it used for?
Before getting to the deductions available on a second home, you should know that the tax liability all depends on what the property is used for. If you earn rental income from it, you will be required to pay tax at the slab rate (after deductions) on the amount you earn from it, unless this amount is lower than the annual letable value of the house, which is the municipal valuation of the house. If you aren’t renting this house out, then no matter how frequently you use it, you must pay tax on the basis of the annual letable value. In this case, you may also have to pay wealth tax (1%, if the property is valued higher than Rs30 lakh).
How to save on tax
Pay tax on the cheaper property: It’s not necessary that you live in the self-occupied property. If you own two properties, you may even designate the one you’re renting out as the self-occupied property. You can even keep switching from one property to the other each year. Obviously, it would be cheaper to declare the property from which your income is higher as the self-occupied property. This way you’d have to only pay tax on the house from which your income is smaller.
Less municipal taxes: You don’t have to pay tax on the full annual letable value. The Income Tax Act, 1961 allows you a full deduction of the municipal taxes you’ve paid in the year.
30% deduction: You’re also allowed a flat 30% deduction on the total taxable value of your property, for maintaining the house, any home insurance or other house-related expenses. It doesn’t matter if you actually incurred them.
Deduct home loan interest: If you’ve taken a loan to buy you second house, you can also claim a deduction on the interest component of the loan. If you aren’t renting a house out, the maximum deduction you can claim per year on the amount paid as interest on a home loan is Rs1.5 lakh. On a house you’re renting out, however, there’s no such limit.