As per Indian tax laws, if a person owns just one property and it is vacant, the property can be considered self-occupied (SOP) and its annual value will be seen as nil. However, if an individual owns two houses and both are self occupied or vacant, any one can be considered SOP and the other will be deemed as let out. A notional rent will have to be computed and considered as the property’s annual value. The net income, after deductions, would have to be offered to tax under ‘Income from House Property’.
The tax implications remain the same whether the second house is used as a weekend, holiday or retirement home. If the second home is let out, the rent or the annual value, whichever is higher, will be taxed.
To arrive at the taxable income, certain deductions are allowed:
a) Municipal taxes paid to the local/municipal authority during the fiscal. Irrespective of the year for which the tax is paid, the same will be allowed as a deduction;
b) A flat deduction of 30% of the net amount after deduction of municipal taxes; and
c) Interest taken for purchase/construction of property, depending on whether the property is self-occupied or let out.
If the property is purchased: Where the property is self-occupied, a deduction of R2,00,000 per year is allowed. Where the property is let out or deemed let out, the entire interest paid would be allowed as a deduction.
If the property is under construction: The interest paid on home loan till the completion of construction (pre-construction interest) is allowed as a tax deduction in five equal instalments (i.e., 20% each year) from the year of completion of construction.
The principal paid for loan repayment is eligible for deduction under Section 80C of the Act, up to a maximum of R1,50,000, along with other specified investments/expenses.
After claiming deductions, if there is a loss, it has to be first set off against income from other house property. The balance can be set off against other incomes earned during the year. The rest can be carried forward for up to eight years and set off against income from house property.
Sale of residential property
Long-term capital gains arise when an individual sells residential property after 36 months. However, exemption is available where the gains are invested to buy another house either one year before, or within two years from, the date of transfer of residential property in case of purchase and three years in case of construction of new property.
If the gains are not used to buy property before the due date of return filing, they are required to be deposited in the Capital gains Account Scheme with notified banks. These funds should be used within the period mentioned above to be eligible for exemption. If the new property is sold within three years of being constructed/purchased, the amount not taxed would be taxed in the year of transfer of the new property by reduction in the cost of acquisition of the new asset sold.
By Homi Mistry
The writer is partner, Deloitte Haskins & Sells LLP. With inputs from Niji Arora and Vivek Mistry