The real estate segment got two energising shots in the form of proposals that make owning a second property and deploying large capital gains from sale of a house property less taxing.
Both the proposals are expected to hand out substantial gains in the form of lower tax outgoes for owners of such properties.
No rent, no tax
Currently, when you own a second house that is either occupied by members of your family or is kept locked, the second property is deemed to be let out according to the income tax law.
Therefore, the owner of a second house had to declare a ‘notional rent’(based on the prevalent rates in that specific neighbourhood) in his income tax returns, though he would never receive the amount. This amount was taxed.
For the next fiscal (starting April 1, 2019), this concept of notional rent has been done away with. Therefore, the owner of a second house from which no rent is received will not have to declare such an income or pay tax on it.
For those with home loans on the second property, the proposal is especially attractive. For example, if a person paid interest on home loan of ₹2.5 lakh annually and had to show a deemed rent of ₹1 lakh per annum, the net tax deduction would only be ₹1.5 lakh.
With the latest Budget proposal, in the above example, the person can avail deduction of up to ₹2 lakh, which is the upper threshold allowed.
More gains on house sale
Previously, the gains from the sale of a house had to be deployed in buying or constructing only one another property, so as to reduce the capital gains payable on the transaction. Indexation — adjusting the acquisition price of the property to inflation — benefits are also available.
Now, the latest Budget proposal allows you to deploy the gains from the sale of a house in two different properties. What’s more, the limit for capital gains is set at a huge ₹2 crore. The sweetener is that indexation benefits too are available. This benefit can be taken only once in a person’s life time.
So, if you make, say, ₹1.5 crore from the sale of your property, you can invest in two houses. You may choose to buy one apartment for ₹1 crore, and another for ₹50 lakh. Or, you can buy one apartment and construct an independent house at another place. You will not be hard-pressed to search for a new property that is in line with the sale proceeds and can instead spread your gains and risks as well.