The tax implications of owning multiple properties

The tax implications of owning multiple properties

A lot of people still choose to invest in real estate rather than in other financial assets and instruments. This then means that people who have surplus money end up with multiple properties. While some have a house in their city of work as well as in their hometown, others prefer to invest in a holiday home. A lot of people also buy multiple properties for rental income and investment purposes.

If you intend to buy multiple properties, it is a must to know about the tax implications of each.

Self-occupied house:

As per the income tax rules, a self-occupied house is one that the taxpayer and his/her family occupied throughout the year. In this case, income that is chargeable to tax under ‘income from house property’ could be either none or negative. Negative figures arise in cases where the taxpayer has taken a home loan for the property, where Section 24(b) of the Income Tax Act 1961 allows for a deduction of INR 2 lakhs concerning interest on housing loans.

While earlier only one property could be regarded as a self-occupied property, the Union Budget extended the benefit to up to two houses in 2019.

Owning a house but not living in it

There might be cases where a taxpayer owns up to two properties but does not stay in them owing to employment, business, profession, etc. in another city or town; and stays in rented accommodation. In this scenario, the owned property will still be considered to be self-occupied if the owner does not let it out to derive any financial benefit from it.

Property to be let out

If a taxpayer owns and occupies more than two properties, then any two of the taxpayer’s choice can be considered as self-occupied, while the others fall in the category of ‘deemed to be let out’. Thus, even when other properties remain vacant throughout the year and do not provide any financial gains, then their potential to earn these gains will be considered, and tax will be levied on that annual value.

Annual value

As per Section 23 of the Income Tax Act, the annual value is the sum for which the property might be expected to let out from year to year. In simpler words, it is the potential rent that the property would have fetched had it been rented out. This annual value is calculated based on numerous factors, such as standard rent in case the property lies under the Rent Control Registration; or the rent based on the municipal value of the property or even the rent equivalent to the rent that other similar properties are fetching in the same area. The highest of these is considered to be the annual value of the property.

After calculating the annual value, one is allowed to claim certain deductions such as taxes paid to the municipal department, standard deductions, and interest paid on home loans, repair, renewal, and construction/reconstruction.