1. I stay in a flat in Mulund which is in my father’s name. Now I am planning to buy a property jointly with my wife in thane or Mulund. We both plan to take a joint loan. I don’t intend to stay in the new flat and it’s for investment purpose. Will put the same on Rent.
a. Does the home I purchase, qualifies as Second Home.
b. Is there a restriction of Jurisdiction to qualify it as 2nd Home? Like is it necessary that both the houses shouldn’t be in the same city.
If yes it qualifies for the 2nd home, then
2. My Loan amount would be approx. 80 lacs
So will the below is legally advisable to save tax
a. Claiming HRA exemption on 1st flat (which is in fathers name)
b. Claiming total interest component as tax exempt (say 6lacs).
Also I suppose the income arising from rent of the 2nd home is taxable, i.e. 70% of Total rent (assuming 30% can be shown as Municipal taxes, repair and society maintenance). Can it be net off against the Interest paid on home loan? Also if it’s negative then can it be deducted from the taxable income?
Rent received annually 1.5 lacs
Minus Municipal tax, repair and maintenance 0.4 5 lacs
Net Rent Income Taxable 1.05 lacs
Minus Loan Interest Component 6 lacs
Net Income Taxable - 4.95 lacs
c. Can both (me and my wife) of us claim exemption on the 4.95lacs?? IF no, then it has to 50-50 or in the ratio of EMI paid?
d. Is it that, the second house gets no tax exemption on principal (1.5lacs)?. It receives only tax exemption on interest.
e. Can any amount that is left over may be carried forward in the tax return as loss from property to the next year? As years go by and the loan gets paid off, the interest component that is getting set-off against the rental income each year will keep on reducing. On the other hand, typically, the rent would tend to increase each year or at least once every 2-3 years. This will go on to lead to a positive differential between the rent received and the interest paid and this difference would be taxable. At this point, I Suppose the carried forward interest will be useful to reduce tax liability. (it is mandatory to file the tax return by July 31 (for individual taxpayers))
f. Even if the 2nd Home is not on rent and kept unoccupied do I need to pay tax on Notional Rent?
1. a. I assume the first property does not have you mentioned as a joint owner. If this is true, the new house you intend to purchase would be your first house.
b. No, second home is just that. If you own another home in any part of India, it will be classified as second home. However, there are some income tax rebates for the rent received etc, depending on the city, etc.
2. a. Generally, it is not very acceptable that a son would pay rent to his father and claim HRA exemption on that. However, there has been an incident where a husband has claimed HRA exemption by paying rent to his wife.
You could try something on those lines but it should be provable with bank account transfers, etc. in case any questions are raised. Read below article for details on such a case. Husband paying rent to wife
b. Since this is not second home, you cannot claim total interest component as tax exemption.
Claiming tax exemption for interest happens under section 24. I do not think can merge the income from other sources (which is what rental income falls under) with tax exemption under section 24. It needs to be declared separately.
The computation suggested by you cannot be used. Deductions have to be claimed under specific sections and caps which have their own limitations. Additionally, being first home, principal and interest component exemption would be capped at Rs. 1 lakhs and Rs. 1.5 Lakhs.
c. The tax rebate claimed for payment of interest and principle is generally in the same ratio as that of ownership or home loan. You can decide and put an agreement regarding this and submit it to your company's auditor.
d. Yes, second home does get tax exemption on principal component. It also gets unlimited exemption on interest component, if rented. Note that the tax exemption for principal is capped at Rs. 1 lakh for this year and will change to Rs. 1.5. Lakhs next year based on the new budget.
e. Yes, it is generally mandatory to file tax returns by July 31st but this year, it seems to have been extended to August 5th.
Additionally, the interest is capped at Rs. 1.5 Lakhs and any further interest component remaining does not get any tax exemption. It cannot be carried forward unless the property is under construction.
f. Yes, generally even if the second home is not occupied, the owner has to pay tax on notional rent. Note that this house is not second house and since you are renting this property, you would need to pay tax on the rental income.
If this is the first time you are filing income tax with home loan, it is advisable to take professional help this time and replicate it next time.
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Identification of whether a house is second house
1 year 6 months ago #6880
Hi sir, I own a house in Bangalore which is given for rent for which Housing loan is closed. I show the rental income from that as my taxable income after deducting the mandatory deductibles. Currently I stay on rent in Hyderabad but planing to purchase a ready to occupy apartment here and will move there upon purchasing it. The question is, the Housing loan I take for this new house in Hyderabad where i am going to stay, does it has full interest exemption from tax or it will have 1L in 80C and tax gain on interest paid upto 2L?