Second House or Vacant House also comes under Income Tax as well as Wealth Tax Purview.
Indian People tends to invest mostly in two assets, first is gold and second in house property. The rising prices of gold as well as property makes it more lucrative but one must consider the tax implications before buying or investing in these assets. Gold does not add any tax liability if it puts idle in you safe or bank but house property does. If an assessee has more than one house property then there will be tax liability on the house kept vacant, equivalent to rented house property. Lets understand this provision in detail.
Income Tax on Second House
The current provisions under the Income Tax Act, 1961 classify house properties into three categories – one self occupied property (SOP), let out property and deemed to be let out property (DLOP). While, the tax implication for the let out property category is relatively straight forward, there is always an area of consideration in respect of the other two categories.
The Act classifies a property as SOP only in two situations. First when the owner actually uses the house for the purpose of his own residence. Second when he is unable to occupy his property which is situated in one location and on account of his employment/business/profession carried out at any other place he stays in a rented premise in such other place. The benefit of classifying a property as an SOP is that the gross taxable value of such property is considered as NIL and a deduction of interest on housing loan for acquisition is allowed deduction up to Rs 1,50,000.
However, if you own more than one such SOP, you have a choice to treat any one of the properties as SOP. The other such property (ies) which lies vacant will be treated as DLOP under the Act. So, if you were under the impression that if no rent is earned there is no tax on any of your properties, you may want to re-look at your year’s tax returns.
If a property is treated as a DLOP, it is effectively put at par with a let out property as far as taxation is concerned. Hence, a notional rental value (method to calculate such value prescribed under the Act) is considered as the gross taxable rent for such property. You are allowed to claim a flat deduction of 30% for repairs and maintenance charges. So, if you have a second flat lying vacant in an area, where the monthly rental is Rs 20,000, it will push up your taxable income by Rs 1.68 lakh (Rs 20,000 x 12 = Rs 2.4 lakh, less 30% = Rs 1.68 lakh).
At first this concept of taxing notional rent may appear very discouraging. However, one should not lose sight of the deduction for interest on amount borrowed to buy/construct this property. In case of a DLOP this interest is fully allowed as a deduction from the notional rental income, as compared to a deduction of only up to Rs 1,50,000 for a SOP. This additional deduction may result in a loss from house property which can be set off against your other taxable income.
Wealth Tax on Vacant House
In addition to the income tax implications, if you own more than one house which is neither rented by you nor used for the purpose of business/profession, you would also be liable to pay wealth tax on the same.
Wealth tax is 1% of the amount by which the combined value of these assets exceeds the Rs 30 lakh limit. So, if you have a vacant flat worth Rs 80 lakh, you will have to pay wealth tax of Rs 50,000 (1% of Rs 50 lakh). If you have other assets, such as jewellery, luxury car and artifacts, the liability rises further.
Wealth tax is a recurrent tax, it is payable on the same assets year after year, even though these assets have not created any value for the owner during the year. Worse, there is no escaping it. The only way to avoid this levy is to opt for assets that are not under its ambit.
Commercial property, for instance, is a more tax-efficient investment than a second house. It is not only exempt from wealth tax but the returns are also higher than those from residential property. Such a property is also eligible for deduction of interest paid on a loan as well as the 30% standard deduction from rental income. So, even as it enjoys all the benefits and even offers a better cash flow, commercial property will not push up your tax liability if you are unable to find a suitable tenant.
Points to Remember
- You are required to pay tax on rental income from the second house even if it is lying vacant.
- If a person owns more than one house and it is vacant, its value is added while calculating the owner’s wealth.
- A 1% wealth tax is payable on the amount exceeding Rs 30 lakh.
- Commercial property is not included while calculating the wealth of a person.
- The interest paid on a loan taken to purchase commercial property is also eligible for tax deduction.
- Commercial space usually fetches a higher rent than residential property. It is also possible to take a loan against this rental income.
- The rental income from commercial property is eligible for 30% standard deduction as in the case of residential property.