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  1. Own more than one house? Here’s how you should plan income tax

Own more than one house? Here’s how you should plan income tax

Home loans are a smart choice if you have a steady source of income. The tax benefits owing to home loan can be maximized if right planning is deployed.

Published: August 17, 2018 11:43 AM
rent free accommodation, RFA, Income Tax, Unfurnished accommodation, Furnished accommodation Home loan deductions need to be carefully planned to get the maximum benefit while computing your income from house property.

There’s really no place like home! And what’s better than owning one house? Owning TWO houses!
Home loans are a smart choice if you have a steady source of income. You create a capital asset while retaining the freedom to determine the instalment and tenure best suited for you. Moreover, the tax benefits of a home loan provide an additional incentive to homeowners. These deductions, however, need to be carefully exercised to get the maximum benefit while computing your income from house property. Here’s how you should plan your taxes according to your situation.

Under section 24, income from house property shall be computed after making the following deductions :
1. Statutory deduction: Standard deduction of 30% of the Net Annual Value.
2. Interest on borrowed Capital: The amount of interest payable on a loan is taken for acquisition, construction, repair or renewal of the property is allowed as a deduction.

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Quantum of deduction for home loan interest:

Particulars Self-occupied property Rented

property

If  a loan is taken after 1.4.99 and property acquisition or construction is completed within 5 years of loan sanction 2,00,000 No limit
A loan is taken for repair or renewal or in any other case 30,000 No limit

 Section 23(4): Two houses for self-occupation:

If you own two houses and both are for the purpose of self-occupation, you can opt for one house to be treated as self-occupied and the other house, to be deemed to let out, despite it being self-occupied or even vacant. For computing the tax on your deemed to be let out a house, the value will be the amount of rent that the house would fetch, should it be let out in the normal course of events. You should exercise this option in such a manner that your taxable income is the least.

For example, Simran owns one house in Delhi and the other in Jaipur, both of which are used for self-occupation. She has taken two home loans with the annual interest component being ₹30,000 and ₹50,000 respectively. In order to choose which house should be treated as self-occupied, she will first determine the taxable income from each.

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Particulars Delhi House Jaipur House
Standard rent* 3,60,000 1,20,000
Less: Municipal taxes paid 6,000 2,000
Less : Statutory deduction @ 30% 1,06,200 35,400
Less : Interest on Home Loan 30,000 50,000
Net Annual Value 2,17,800 32,600

*The amount of rent that the house would fetch, should it be let out in the normal course of events

Tax planning: Income from house property is higher in case of the Delhi house, hence she should opt for the Delhi house to be treated as self-occupied and the Jaipur house to be deemed to be let out. In this case, income from self-occupied property i.e. the Delhi house will be taken to be NIL and the interest on a home loan of ₹30,000 will be a loss under this head making the tax liability equal to ₹2,600 only

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Tax calculation tabulated below :

Particulars Delhi House Jaipur House
Net Annual Value NIL 1,20,000
Less: Municipal taxes paid N.A. 2,000
Less : Statutory deduction @ 30% NIL 35,400
Less : Interest on Home Loan 30,000 50,000
Income from house property (30,000) 32,600

Total Income from house property = ₹32,600 – ₹30,000 = ₹ 2,600

Two houses of which one is on rent:

If you own two houses and one is let out, the annual value of the self-occupied house will be taken as NIL. The deduction for interest on the home loan will, therefore, result in a loss, which can be adjusted against income under other heads.

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For the house that is let out, the annual value will be the higher of
1)Expected rent
2)Actual rent received

For example, Raj owns one house in Delhi where he stays and the other in Gurugram which is let out. The annual rent received is ₹2,00,000 while the expected rent is ₹1,90,000. He also has two home loans with the annual interest component being ₹2,50,000each.

Particulars Delhi House Gurugram House
Net Annual Value NIL 2,00,000
Less: Municipal taxes paid N.A. 0
Less : Statutory deduction @ 30% NIL 60,000
Less : Interest on Home Loan 2,00,000* 2,50,000
Income from house property (2,00,000) (1,10,000)

*deduction of interest on home loan for a self-occupied property is allowed up to ₹2,00,000 only

Tax planning: Total loss from house property is ₹ 3,10,000. This loss can be set off against income from other heads only to the extent of ₹ 2,00,000 (according to the amendment as per Budget 2017). The remaining loss of ₹ 1,10,000 can be carried forward for the next 8 Assessment Years.

(Written by Tanvi Loond Chopra, founder, Insta C.A)

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