Owning two houses is almost becoming a norm among a section of our society. Therefore, it is important to understand its tax implications. As per the Income Tax Act, 1961, a house property could be classified as let-out property (LOP), self-occupied property (SOP), or deemed to be let-out property (DLOP).

LOP. If any of the houses is actually let out, it will be taxed as LOP, based on its annual value, i.e., the actual rent or reasonable expected rent in a financial year (FY), whichever is higher. Deductions towards municipal taxes paid, repairs and maintenance (flat deduction of 30% of net annual value) and entire interest on housing loan are allowed. Deduction towards interest for the pre-construction/acquisition period is split in five equal instalments starting from the FY in which the LOP is constructed/acquired.

SOP. One house that is used for actual self-residence or is lying vacant, on account of employment/business at another location, causing the owner to reside in a rented property is treated as SOP. The annual value of SOP is considered as nil. Only deduction available is towards interest paid on housing loan and is capped at R1,50,000 per FY, resulting in a loss.

DLOP. The other vacant property is treated as DLOP. Effectively, DLOP is at par with LOP. A notional rental value is considered as its annual value. All deductions as available to LOP are allowed there from. While the concept of taxing notional rent may appear discouraging, it may be noted that for a DLOP, the entire interest on loan (if the DLOP is purchased against a loan) is deductible vis-?-vis an SOP where the deduction is restricted.

Deduction towards principal repayment of the housing loan, up to a maximum R1 lakh per FY (as part of the overall limit under Section 80C) can be claimed from the gross total income in all the above cases. Capital gains tax implications on sale are same for all properties.

In addition to the income tax implications, if you own more than one house, which is neither rented by you (for more than 300 days in a FY) nor used for the purpose of business/profession, you would also be liable to pay wealth tax on the other house. So, if you were under the impression that your vacant houses do not impact your tax position, you may need to reconsider.

There are certain amendments proposed in the Direct Taxes Code (DTC) for the treatment of a house property, which include restricting the deduction towards repairs and maintenance to 20% and doing away with the current equivalent 80C provision of deduction towards housing loan principal repayment.

Also, the concept of DLOP is proposed to be discontinued. Accordingly, if a property is actually not let out during a FY, then it shall not be taxable and no deductions shall be allowed against such property. However, the actual tax position can be firmed up only once the proposed DTC is implemented.

– The writer is partner, Tax, KPMG