Know Your Tax Liabilities If You Own Multiple Residential Properties

Due to low risk and steady price appreciation, real estate investments, especially in residential properties, have become widespread. Many people look at investing in multiple properties either for capital appreciation or to earn regular rent or use it as their vacation home during holidays. Though there are no restrictions on the number of homes you can own, there will be tax burden that you need to be aware of.

Here’s what you need to keep in mind:

The Taxability Factor

According to the Indian Income Tax Act, 1961, only one residential property is considered as self-occupied property (SOP) and is treated as having nil or no annual income, and hence no tax is applied on it. Any additional house, even if it is kept vacant is deemed as a let out property. A notional rent (method to calculate is prescribed in the Income Tax Act) is calculated on it and is considered as its annual value. You need to pay tax on this rental value after applying available deductions. These tax implications remain the same whether the additional house is used as a vacation or retirement home.

If the second home is actually let out, the actual rent or reasonable expected rent, whichever is higher is taken as annual value on which  property tax is calculated.

Deductions you can avail

1. Municipal taxes: Municipal taxes paid by you for multiple properties is allowed for deductions, provided they are claimed by you in the financial year when you made the payments.

2. Flat deductions: The Income Tax Act-1961 offers a standard deduction of 30% on the net annual value of the property after deducting property tax levied by civic bodies. This deduction is on a notional basis for the expenses incurred by you in renovations, repair etc., and is irrespective of the actual expenditure done by you.

3. Interest payment: If a loan is taken to purchase a property which is self-occupied, you can take tax rebate for the interest paid up to Rs. 2 lakh, under Section 24 (b) of the Income Tax Act. In case of more than one property, deduction on the entire interest amount is allowed, provided it is let out or deemed let out. This deduction is available even if the money borrowed is from your friends or relatives.

4. Repayment of the principal amount: Currently, Section 80C of the Income Tax Act allows for a total deduction of Rs. 1.5 lakh for principal repayment. You can claim it for any number of housing loans, keeping the Rs. 1.5 lakh cap in mind. It is important to note that such deductions are only available for already constructed/completed properties and not for under construction properties.

Repayment of loans taken from friends/relatives are not eligible for these deductions.

In case you have a query, you can put it in the comment box below.