With Budget round the corner, Second property is a good investment

Investors in second homes will benefit both in terms of capital appreciation and fiscal sops. Generally, people invest in a second home in order to earn rental income. Besides this, the benefits that would accrue over a period of time clearly illustrate the inherent advantages of investing in a second home.

While investing in a second home, an investor opts for a home loan or sells other assets and reinvests the sale proceeds in the new home. The maximum amount of interest on the loan that is allowed as a deduction is Rs 1.50 lakhs, which would mean a tax saving of nearly Rs 45,000 per individual. This is apart from the permissible deduction up to Rs 1 lakh within the overall limit of other deduction under Section 80C of the Income Tax Act.

When you reinvest your sale proceeds while buying a second home, there is no liability to pay tax on the capital gains. The concept of cost inflation index that will increase the cost price of the building taking into account the inflation index is also available. Additionally, any amount spent on improving the home is also deducted from the gross amount of capital gains.

The long-term capital gains for investors in a second home are exempt if they have been invested in the purchase of another house within one year or before two years after transfer, or in the construction of a residential building within three years of transfer and here is no sale of such a house for three years. You should use the capital gains by the date of filing of income tax returns or deposit the used amount by the last date of voluntary filing of income tax returns in a special account in a nationalised bank.

There are other tax advantages while investing in a second home. If the second home is let-out for a minimum period of 300 days in a calendar year, it is exempt from wealth tax. Moreover, tax liability arises only when the rent is actually received. If the second home remains vacant or rent becomes unrealisable due to non-payment by the tenant, there would be no income tax liability. This is because tax is payable only in respect of rent received.

The rules also prescribe that the amount realised from the tenant in respect of the unrealised rent of the previous year would be subjected to income tax in the year in which such rent is realised. This is applicable to all types of properties, be it residential, commercial or industrial property. There is no change in the provision for exemption from wealth tax for investments in commercial properties.

Also, those who have invested in a second home can avail of reverse mortgage scheme during their retirement period. They need not depend on anyone for regular income in case they own more than one residential property. It has also been clarified that the amount received from a financial institution against a reverse mortgage scheme is only a loan and senior citizens need not worry about the tax liability arising out of the loan amount.

Source: ET