Taxability of second home

For a majority of wealthy people, real estate has emerged as one of the most profitable investment options in recent years. We give below a primer on the tax implications on a second home under the I-T Act 1961. 

Second house is let-out

If the second house is let out on rent, then rent received from the property will be taxed. For instance, Sunil has two flats in Thane--one in Majiwada and the other Vasant Vihar. Out of the two flats, he retains the Majiwada flat for his residence and rents out the Vasant Vihar flat to one of his colleagues, which fetches a rental income of Rs 10,000 per month.

"Thus, the annual rental income of Rs 1,20,000 from the Vasant Vihar flat--after reducing the municipal taxes, standard deduction, and interest--shall be taxable on Sunil.

Second house is self-occupied

In this case, the owner will have the option to select any one property as being used for self-occupation. The other property will be treated as 'deemed to be let out' and the estimated annual rent will be considered as taxable. Taking the first example cited, we assume that while the Majiwada flat is retained for Sunil's residence, the Vasant Vihar flat is occupied by Sunil's family. In such a situation, Sunil has an option to treat either of the two flats as self-occupied and consider the other as deemed to be let-out.

The flat considered as deemed to be let-out will be taxed on a notional rental income that the flat can generate. If the notional rent of the Majiwada flat, for instance, is Rs 2,00,000 per annum and of the Vasant Vihar flat is Rs 2,60,000 per annum, then Sunil can treat the Vasant Vihar flat as self-occupied and the rent of Rs 2,00,000 from the Majiwada flat will be liable for tax, after providing for necessary deductions like municipal taxes, standard deduction, and interest.

Second house remains vacant

In case the second house remains vacant, that house will be treated as 'deemed to be let out' and the estimated annual rent will be considered as the taxable value. For example, if Sunil opts to keep the second flat as vacant, then one of the flats has to be considered as deemed to be let out and the notional value will be taxed.

Second house is used as a holiday home

As the benefit of self-occupied property is available for only one home, the estimated annual rent will be considered as the taxable value. For instance, Mohit has a property in Thane, which is occupied for his own residence. He also has a small apartment in Shahapur, which he uses as a holiday home

In such a scenario, though Mohit generates no real income from either of the property, he can consider only one of the properties as self-occupied. If he considers the Thane house as self-occupied, then the Shahapur property will be treated as deemed to be let out and the expected rental income will be taxed after reducing municipal taxes, standard deduction, and interest.

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