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When tax officials conducted a raid at a prominent Bollywood star’s home, it was found that her home was not a single flat but five flats broken down and turned into one. So what went wrong here? The star avoided payment of taxes on the income earned from owning a second house.
Owning a Second House: Tax on Property
If one owns a second house, the owner has to pay tax on the rent earned from the house other than the self-occupied property. Even if the house is lying vacant, tax has to be paid based on the deemed rental income prevailing in that residential area. Amongst the owned properties, only one shall be considered “self-occupied property”. Other properties are supposed to earn a notional income, which will be taxed at the normal rates after the 30% standard deduction.
So, if you have a second flat, which is not a self-occupied property, lying vacant in an area where the monthly rental is Rs 20,000, it will push up your taxable income by Rs 1.68 lakhs:
Wealth Tax on Second House
The current Income Tax law creates a major disincentive for owning a second house but the Direct Tax Code seeks to change that. If this proposal is passed by the Parliament, a house owner won’t have to pay tax on the deemed rent received from an unoccupied second house effective from April 1, 2012. There’s a condition here: the owner’s combined wealth shouldn’t exceed Rs 30 lakh.
Wealth tax is 1% of the amount by which the combined value of these assets exceeds Rs 30 lakhs.
Let’s consider an example to clearly understand the implication of the Direct Tax Code:
If I live in April 1, 2012 and own an unoccupied second property worth Rs 80 lakhs, what do I pay as tax?
Avoid Wealth Tax on Second House
Wealth tax is recurring in nature; there is no escaping it even though these assets have not created any value for the owner during the year. The only way to avoid this levy is to opt for assets that are not under its ambit.
How about investing in commercial establishments? Here are the benefits: