Second Residential Property Is A Threat To Tax Planning
Generally speaking, when you have more than one residential house it would speak of the development of your status and prosperity in your family. But the fact is that a second residential house in your name from the point of tax planning is no good. The second residential house in your name would not bring in joy and laughter for you specially if you look at it purely from the point of view of tax planning.
Yes, it is true that the best tax planning
can be achieved if every family member possesses one residential house as per
the spirit of tax planning. If a person were to possess more than one
residential house property he only lands himself in a fool’s paradise. The real
life tax planning theme is that even when you can afford to buy a second
residential house property, as far as possible, do not buy the second residential
house property in your name.
There are various disadvantages from the
point of tax planning in buying a second residential house property in your own
name.
It is a well- known fact that one house
property is completely exempt from wealth tax — sky is the limit as far as the
size and the value of the property is concerned. If you possess the second
residential house property of your own which has been kept ready for your own
use only, then the said second residential house property will be subjected to
wealth tax. Apart from the increased burden of wealth tax in respect of the
second house property the benefit of interest on loan also cannot be taken
advantage of in case you are going in for buying your second residential house
property in your name for self housing.
The Income Tax Law very clearly says that
in respect of a housing loan taken on or after 1st April, 1999 in respect of a residential
house property the deduction in respect of interest on loan that would be
allowed deduction would be to the tune of ` 1,50,000 p.a.
However, if a person were to take a loan
and construct the second residential house property for his own use, the
benefit of this deduction of interest on loan will not be allowed at all to
him. This is because of the fact that under the tax law the interest on loan is
allowed as a deduction only in respect of one residential self-occupied house
property.
Another great disadvantage of buying a
second residential house property in your name is because of a provision existing
under the Income Tax Law whereby to your income would be added deemed income
from the second residential house property owned by you and kept for your own
use.
The law provides for “NIL” taxation
of the deemed rental income in respect of your first residential house
property. But in the case of second and subsequent residential house properties
which are vacant and are kept for your own use only then the problem is that
all such subsequent residential self-occupied house properties would be
subjected to income tax in respect of deemed rental income of the residential
house properties which are in excess of one property.
Hence it is strongly recommended that as
far as possible do not invest in more than one residential house property for
your self use. In case you are going in for second residential house property
with the basic objective of letting out only, then there is no problem. The
real problem from the point of tax planning is only in case of those taxpayers
who would like to buy more than one residential house property for their own
personal use.
What is then recommended is that each
family member should so plan his affairs that every family member enjoys the
benefit of wealth tax exemption for one residential house property so also
exemption or deduction in respect of interest on loan for one residential house
property.
Thus, for optimum level of tax planning for
all categories of investors and tax payers, the best solution would lie if the
investment is made in the name of different family members and that each family
member is the owner of one self-occupied residential house property only. Thus,
in case you are planning for saving income tax in respect of your house
property investment, it is worthwhile that you do not enter the area of buying
second residential house property in your own name. Better it would be if you
exercise the option of buying second residential house property in the names of
other family members who have no residential house property of their own.