All you need to know about the Tax on Rental Income

Bought a second house? Here is how it will be taxed

A lot of people own more than one house, whether it is ancestral property or when you upgrade to a bigger place. You may choose to keep the property vacant or put it on rent. If you also have bought a second house or are planning to buy, or if you own 2 properties and both are on rent – say if you have moved abroad or shifted to a different city, you must know that the tax treatment of interest paid on home loan will be different in all cases.

Self-Occupied Property (SOP) and Let-Out Property

To understand the taxability of house property, know that there are two components of house property: Self-Occupied Property (SOP) and Let-Out Property. Residential property that the taxpayer uses for his/her own residence is known as self-occupied property (SOP), while the other is considered as let-out property or rented. Even if the taxpayer doesn’t rent out the other house, it will still be considered as ‘deemed to be let out’, and taxed accordingly. Income from house property is taxable once the homeowner gets possession of the property.

Rules in case one property is on Rent

If you are planning to rent out one of your properties, you will have to declare the rental income received during the year while filing your income tax returns for the year. If as a property owner you rent out the property, the actual rent received will be taken as the gross annual value of the property and you will be able to deduct the standard deduction of 30 per cent of the income, the interest on the loan and municipal taxes paid during the year, along with the entire interest paid on housing loan. If the net received exceeds after deduction of the above expenses, that will then be added to the gross total income of the taxpayer and will be taxed as per his/her slab. The principal amount, however, remains eligible for deduction under the overall limit of Rs 1.5 lakh under Section 80C.

Rules in case both houses are on rent

Say you want to double your gains by putting both your properties on rent. You can also do this when you shift out of the country to settle abroad or when you live with your parents. Here, your total rental income (from both homes) is considered taxable. However, the good part is that the amount you repay as interest on the home loan for both these properties will be eligible for complete interest deductions under Section 24 of the Income Tax Act.

Both Properties are Self-Occupied Property (SOP)

If a property holder is using a house property for self-consumption purposes, then the gross annual value will be considered as NIL as per Section 23 of the Income Tax Act, 1961. In the case of the second property, the notional rent is not taxed. Under Section 80C of the Income Tax Act, 1961, the taxpayer can claim up to Rs 2 lakh as deduction towards interest on home loan and Rs 1.5 lakh towards principal repayment on housing loan, under the old tax regime. Under the new tax regime, however, interest on housing loans and principal repayment on housing loans will not be eligible for a tax deduction.

Having said that, from the last financial year FY2019-20, the benefit of considering houses as self-occupied has been extended to 2 houses. Homeowners can now claim two properties as self-occupied and remaining houses as ‘let out property’ for income tax purposes. Therefore, in the case of 2 houses, homeowners can claim both houses as self-occupied properties and claim the interest paid on loan amount under Section 24. However, for both self-occupied properties, note that the interest claim cannot exceed Rs 2 lakh in total in a financial year. Additionally, if the second property is under construction, there is no tax incidence related to it.

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