Tax is a major issue for purchasing a second house as an investment. A person is required to pay tax on the rental income arising out of a second house even if it is vacant. But the Direct Taxes Code has proposed to change the rule regarding the notional income arising out of a second house.
According to the proposal, the owner of a house does not need to pay tax on the deemed rent received from a house if it is a vacant one. But there are other taxation issues to be considered while purchasing a second house.
One should know that he will not get any tax benefit on a second house. The second point which one needs to remember is that a second house is treated as a “wealth” on which wealth tax is imposed.
Wealth tax liabilities arising out of a second house:
Owners of vacant houses require paying wealth tax when their combined value is more than Rs.30 lakh. The assets taken into consideration as an individual’s wealth are gold, vacant residential property, luxury items, cars, pieces of art and cash.
Wealth tax is 1% of the amount of the combined value of these assets if it is more than Rs.30 lakh. If you have a vacant house having value of more than Rs.80 lakh, you may not have to pay tax for the rent that it may fetch, but you will have to pay wealth tax amounting to 1% of Rs.80 lakh. If you have other assets, like ornaments, luxury cars, etc. the liability rises further.
Wealth tax is a recurrent one which is payable on the same assets every year though such assets did not fetch any income for the owner during the year.
How can one escape paying wealth tax?
Generally one cannot escape paying wealth tax. The only way to avoid it is to choose those assets which are not within the ambit of wealth tax.
Is investing in a commercial property a more beneficial one?
Commercial property is a better investment than a second house. Commercial property is not included while calculating the wealth or assets of an individual. The interest paid towards any loan taken to purchase a commercial property is also eligible for tax deduction.
Commercial space generally fetches more rent than residential property. One can also take a loan against its rental income.
It is exempt from wealth tax and its returns are also higher than those derived from residential property. A commercial property also gets 30% standard deduction from its rental income.
A commercial property enjoys all the benefits and provides a good cash flow, but it does not push up your tax liability if you cannot find a suitable tenant.