Financial Express | Aug 20, 2020
If one were to observe the investment preferences of a majority of Indian investors across varied asset classes, real estate or property would emerge as a top investment destination. This brings us to a fundamental question on whether an Indian citizen can buy and own a second home or more than one home in the country.
Thankfully, the answer to the query is absolutely simple. The Constitution of India has guaranteed the Right to Property to all the citizens of India and the law does not specify any restrictions on the purchase of a second residential property in India.
“A second home can be viewed as a strategic investment as part of a diversified asset portfolio. It holds the potential for long-term capital value appreciation. While earning substantial income in the form of rentals, it can also take care of the maintenance cost of the property. A second property can be an income generation tool and create a substantial savings corpus for the owner over a period of time. Alternatively, it can also serve the purpose of a weekend getaway home for relaxation and recreation,” says Rajesh Narain Gupta, Managing Partner, SNG & Partners.
However, while taking the crucial decision of making a second home purchase, several key issues need to be taken into account.
Income Tax Benefits
A key aspect while buying a second home is understanding the taxation component of the purchase. A home buyer needs to be aware of the tax deductions he/she can avail.
In present times, people generally have more than one residential house. In some cases, all house property may remain self-occupied, while in other cases, one may remain self-occupied and the other one may be rented out. Let’s understand how we can claim tax benefits on the second house.
According to tax experts, you can claim deduction for interest payable on a loan, taken for purchase, construction, repair or renovation of any property, whether commercial or residential, under Section 24(b).
# Tax benefit on payment of interest: An individual may have to maintain two houses at two different locations, which could be attributable to his employment, children’s education and residence for parents, so on and so forth. Hence, for all purposes, the second house property is used as self-occupied. To give benefit to such taxpayers, from the assessment year 2020-21, the income tax laws allow them to have two residential houses as self-occupied for which the valuation for rental income purposes is to be considered as NIL.
Taxpayers can claim maximum consolidated deduction in respect to interest payment on a loan, taken for purchase or construction, up to Rs 2 lakh per annum. “For deductions like repair, renovation etc., the threshold limit shall be Rs 30,000. This is super beneficial for cases where the interest and renovation for one house is less than Rs 2 lakh but combined expenses for both the houses are up to Rs 2 lakh. Hence, the taxpayer can claim benefit for a significant higher amount. In case of more than two self-occupied house property, they shall be treated as ‘deemed to be let out house property’ and all tax provisions pertaining to let-out house property and annual valuation rules shall apply as per provisions of Section 23 of the Income Tax Act,” says Kapil Rana, Founder & Chairman, HostBooks Ltd.
Where the second house property is let-out, the Income Tax laws allow you to avail tax benefit on the entire interest amount of a loan of such house property without having any limit for deduction under Section 24b of the Income Tax Act. In case there are more than two let-out house properties, annual valuation shall be as per the provisions of the Section 23 of the Income Tax Act.
# Tax benefit on repayment of principal: Each EMI installment amount of the home loan taken for purchase or construction of the residential house property has two parts, i.e. Interest amount and principal amount. “One can take the benefit of the principal repayment part in certain cases under Section 80C. In case any house property, whether self-occupied or let-out, is eligible for deduction for repayment of all the principal amount, which has been reimbursed, that shall be allowed as deduction under Section 80C, subject to the overall limit defined under Section 80E, which is Rs 1.5 lakh,” says Rana.
Property Attachment Rules
It also needs to be noted that in some states like Delhi one residential house is exempted from attachment by creditors provided the said house is not mortgaged. Therefore, “if a particular person owns a residential house in Delhi which has not been mortgaged, the creditor cannot attach one residential house even if there is a loan default,” informs Gupta.
The Benami Transactions (Prohibition) Amendment Act, 2016 (Amendment Act) came into effect from November 1, 2016. This Amendment Act has been enacted by the Government so as to curtail transactions which are being affected in relation to the purchase of property where funds for such purchase of a piece of property originate from one entity whereas the beneficiary of the property is another entity.
The Amendment Act brought with it multiple changes to the original legislation, that is, the Prohibition of Benami Property Transactions Act, 1988 (Principal Act). “It has been argued that the effect of the Amendment Act may be considered to be retrospective in nature. However, Indian Courts are still in the process interpreting the intent and object of the Amendment Act with regard to its effect. For example, the Jaipur Bench of the Rajasthan High Court in the case of Niharika Jain and Ors. vs. Union of India and Ors., held that based on settled law, the Amendment Act amending the Principal Act cannot have retrospective effect,” says Mrinal Kumar, Partner, Real Estate, General Corporate, Shardul Amarchand Mangaldas and Co.
As benami transactions have existed in India for parking unaccounted cash since numerous years, the Amendment Act was a step forward by the legislature to curb such transactions. The Amendment Act was enacted at the time when it was most required so as to restrict the growing corruption in India and as part of the current government’s mission for eradication of corruption. Since the time of its enactment, the ramifications of the Amendment Act have been discussed widely and the seizure of assets of multiple prominent personalities have been reported.
However, “under the laws currently in force in India, there are no restrictions in relation to the number of properties that can be held by any one person,” says Kumar.
Property Rules Abroad
Property rules, however, differ from country to country. For example, if one looks at the legal regime in the United Kingdom, under English law, when a property is purchased by one entity in the name of another, it results in a trust being created in favour of the person who has paid the purchase money, that is, the person in whose name the property has been transferred, holds the property in the form of the trust for the person who has paid the purchase money, unless such property is intended to be a gift to the child, wife or grandchild of the person who has paid the purchase money. Therefore, the position under the law in the United Kingdom is distinct from the legal position in our country.
Buying Property For Investment Purposes
People buy property for both self-use and investment purposes. There are also no restrictions in relation to the number of property one can own in India, provided you do it legally and could also show sufficient proof of income or financial means, when asked by the taxman. However, keeping in view the Benami Act and the legal complexities of owning a piece of property compared to its returns, investing in property now-a-days does not seem to be a good idea.
Therefore, “while, previously purchasing real estate was considered a good investment, however, in the current market and the dynamic legal regime for the real estate sector, purchasing real estate assets for investment purposes would not be advisable,” says Kumar.