No Second House

Why not to buy a second house

If you own more than one house, you have to pay tax on the rent earned from the house you are not occupying. Even if the house is lying vacant, you have to pay tax on the deemed rental income from that property based on the prevailing rate in that area. Only one of the properties will be allowed to be treated as self-occupied and the others will earn a notional income, which will be taxed at the normal rates after 30% standard deduction. 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).

This tax has been a major disincentive for buying a second house as an investment. However, the DTC proposes to change the rule regarding notional income. If the proposal is passed by Parliament, a house owner won't have to pay tax on the deemed rent received from a house that is vacant from 1 April 2012.

There are, however, other taxation issues to content with. Owners of vacant residential properties also have to pay wealth tax if their combined wealth exceeds Rs 30 lakh. The assets considered while assessing an individual's wealth include gold, vacant residential property, luxury watches, cars, yachts, helicopters, pieces of art and artifacts, and hard cash. 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 may not have to pay tax on the deemed rent from year 2012 onwards, but 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. 

Commercial property, for instance, is a more tax-efficient investment than a second house. It is not only exempt from wealth 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 offer a better cash flow, commercial property will not push up your tax liability if you are unable to find a suitable tenant.

What's taxable

• 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