Indians, when they can afford it, have had the tendency to own more than one house. This is due to their propensity to invest in real estate as well as to provide accommodation for larger families, or to maintain a seat of residence in their hometowns as they pursue career opportunities in other cities and live there. The Interim Budget 2019 has proposed tax sops that makes is easier and desirable to buy a second home. Let’s take a look at them.
No more tax on notional rent
Till now, owning a second home came with an additional liability of notional rent. One of the biggest benefits for second home buyers/owners in Budget 2019 has been the scrapping of tax on notional rent.
What is notional rent?
If you have two self-occupied houses (even if one is simply locked up), you have to pay tax on notional rent from the house. Notional rent is the rent you are supposed to be earning if the property were let out. Introduced to discourage taxpayers from leaving houses vacant blocking rental property supply, notional rent has flummoxed many a homeowner and given rise to tax disputes. Primarily because it’s difficult to calculate and must take in to account the concepts of fair rent, municipal value and standard rent.
How did notional rent affect taxable income?
To simplify, let’s assume after taking fair rent, municipal value and standard rent in to account, your second home had the potential to earn a rental income of INR 20,000 per month or INR 2,40,000 per annum. Here is how it contributes to your taxable income and tax payable:
|Gross Annual Income from second house||2,40,000|
|Less Municipal Taxes paid on the house property||20,000|
|Net Annual Income from second house||2,20,000|
|Less 30% standard deduction||66,000|
|Income taxable under house property||1,54,000|
|Tax slab of assessee||Tax payable on income from house property (including 4% cess)|
As the new budget comes in to effect this additional outgo will remain in the hands of the taxpayer contributing to significant tax savings.
However, this change is beneficial only to those people who have no outstanding loan on the second self-occupied house. Housing loan interest benefit for tax planning on both houses is now restricted to INR 2 lakh and the carry-forward of remaining housing loan interest on the second self-occupied house is no longer allowed.
Savings on capital gains tax
Another reason to go ahead and invest in that second home is the capital gains benefit that comes with Budget 2019. Till now, according to Section 54 of the Income Tax Act, taxpayers could save tax on capital gains from sale of a house property by investing it in one residential property. This was a concern in cases where people sold ancestral homes and split the gains amongst family. As the Budget 2019 goes in to effect, taxpayers will reap the benefit of capital gains rollover by being able to invest in 2 house properties instead of one. This benefit can only be availed once in a lifetime and that to for a maximum capital gain of INR 2 crore.
Tax savings on rental income
Even if you don’t want to self occupy your second home, there are benefits from a rental income perspective. If you intend to lease out your second home to non-individuals, the Budget 2019 now gives you relief on TDS for rent of up to INR 2.4 lakh per annum up from INR 1.8 lakh as of last year.
These sops when combined with multiple other income tax gains favourable to the homebuyer are creating a very positive environment for people looking to invest in their second home. What are you waiting for? Start looking for your second home now!