BUSINESS

Here's How Budget 2017 Makes Owning A Second Home A Loss-Making Idea

If you were fancying a second home, you should read this.

03/02/2017 4:43 PM IST | Updated 03/02/2017 5:26 PM IST
Amit Dave / Reuters

The Union Budget 2017 has been fairly generous to the middle class, slashing tax rates for people with incomes up to ₹5 lakhs to 5 per cent, while raising taxes for the rich.

Continuing its anti-black money mission, Budget 2017 laid out radical anti-cash measures and simplified tax filing incentives for tax payers in hopes to broaden the tax net. On the housing front, however, while reiterating its commitment to affordable housing, the budget has come down strictly on property owners, especially those who own more than one home.

According to the budget, the usual tax benefit on loan repayment of second homes will now be capped at ₹2 lakhs, a brand new cap has been introduced. Home-owners thus far could set off an unlimited amount in loan repayments on second homes. As per the proposal, the owner can now set off those losses only up to ₹2 lakhs under the Section 71 of the Income Tax Act.

This new provision is likely to hurt people who own expensive second homes in the form of investment properties in a big way, said Preeti Khurana, chief editor at online tax filing services company Clear Tax.

Khurana notes that individual tax payers who have to pay more than ₹ 2 lakhs in these loan repayments will have to pay higher taxes. For instance, she said a person paying ₹10 lakh on interest payments on a second home but earning only ₹5 lakh from rental income from that property, was allowed to set off the remaining interest payment amount of ₹5 lakh from salary or other forms of income.

That means, Khurana, said, that people interested in investing should consider other assets rather than property.

"They need to start diversifying and start moving to other avenues and instruments like equity, said Khurana. Don't invest a lot in property. People who have invested in a second home are on a losing foot now."

The new rules, however are in line with international best practices to help set-off of loss under the head 'Income from house property,' according to the budget bill.

"However, the unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years in accordance with the existing provisions of the Act," the bill said.

In addition, given that the real estate market is set for a correction, it's probably best to wait and buy when home prices fall anyway.

According to ratings agency Fitch, weak demand and declining sales could force a correction in property prices in 2017, with steeper price fall on sales of higher-end and premium property, usually targeted by high-net-worth individuals and investors,

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