How Is a Second Home Taxed? ITR Filing Rules Explained

As the income tax return (ITR) filing deadline approaches, taxpayers owning a second home need to pay close attention to how the property is reported in their returns. The tax treatment of a second home depends on whether it is self-occupied, rented out or vacant.

Incorrect disclosure can result in errors in income reporting and tax computation. Taxpayers are therefore advised to understand the applicable rules before filing their returns.

How to Report a Second Home in Income Tax Return?

Under the Income Tax Act, 1961, taxpayers can treat up to 2 residential properties as self-occupied. The annual value of these self-occupied properties is considered nil, which means no rental income is added to taxable income.

This provision allows eligible homeowners to avoid taxation on notional rental income for these 2 houses. Proper classification of the property in the ITR is essential to ensure accurate reporting.

Tax Rules for More Than 2 Residential Properties

If a taxpayer owns more than 2 houses, any additional vacant property is treated as a deemed let-out property. In such cases, tax is levied on the notional rental income that the property is expected to generate, even if it is not actually rented out.

One of the common mistakes during ITR filing is reporting such additional properties as self-occupied instead of deemed let out. This can lead to incorrect income disclosure and potential compliance issues.

Rental Income Tax and Deduction on Second Home

For rented or deemed let-out properties, taxpayers can claim a standard deduction of 30% on rental income towards maintenance expenses. This deduction is available irrespective of the actual maintenance expenditure incurred during the year.

The provision helps reduce the taxable income arising from house property. Taxpayers should ensure that rental income and related deductions are accurately reflected in their returns.

Old vs New Tax Regime for Home Loan Benefits

The choice between the old and new tax regimes can significantly affect taxpayers who have housing loans on their second homes. Certain deductions and benefits associated with house property income may differ depending on the regime selected.

As a result, taxpayers should compare both tax regimes before filing their ITR to assess the overall tax impact. Evaluating the available deductions can help determine which regime aligns better with their financial situation.

Conclusion

Tax implications associated with a second home do not end with ownership and reporting. If the property is sold after being held for more than 24 months, the gains are treated as long-term capital gains, and eligible taxpayers may claim exemptions under Sections 54 and 54EC subject to prescribed conditions.

Before filing an ITR, second-home owners should keep documents such as sale deeds, home loan interest certificates, municipal tax receipts, rental agreements and co-ownership records readily available. Maintaining proper documentation is important as tax authorities increasingly use data analytics to verify information reported by taxpayers.

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