There are various disadvantages from the point of tax planning in buying a second residential house property in your own name.
It is a well- known fact that one house property is completely exempt from wealth tax — sky is the limit as far as the size and the value of the property is concerned. If you possess the second residential house property of your own which has been kept ready for your own use only, then the said second residential house property will be subjected to wealth tax. Apart from the increased burden of wealth tax in respect of the second house property the benefit of interest on loan also cannot be taken advantage of in case you are going in for buying your second residential house property in your name for self housing.
The Income Tax Law very clearly says that in respect of a housing loan taken on or after 1st April, 1999 in respect of a residential house property the deduction in respect of interest on loan that would be allowed deduction would be to the tune of ` 1,50,000 p.a.
However, if a person were to take a loan and construct the second residential house property for his own use, the benefit of this deduction of interest on loan will not be allowed at all to him. This is because of the fact that under the tax law the interest on loan is allowed as a deduction only in respect of one residential self-occupied house property.
Another great disadvantage of buying a second residential house property in your name is because of a provision existing under the Income Tax Law whereby to your income would be added deemed income from the second residential house property owned by you and kept for your own use.
The law provides for “NIL” taxation of the deemed rental income in respect of your first residential house property. But in the case of second and subsequent residential house properties which are vacant and are kept for your own use only then the problem is that all such subsequent residential self-occupied house properties would be subjected to income tax in respect of deemed rental income of the residential house properties which are in excess of one property.
Hence it is strongly recommended that as far as possible do not invest in more than one residential house property for your self use. In case you are going in for second residential house property with the basic objective of letting out only, then there is no problem. The real problem from the point of tax planning is only in case of those taxpayers who would like to buy more than one residential house property for their own personal use.
What is then recommended is that each family member should so plan his affairs that every family member enjoys the benefit of wealth tax exemption for one residential house property so also exemption or deduction in respect of interest on loan for one residential house property.
Thus, for optimum level of tax planning for all categories of investors and tax payers, the best solution would lie if the investment is made in the name of different family members and that each family member is the owner of one self-occupied residential house property only. Thus, in case you are planning for saving income tax in respect of your house property investment, it is worthwhile that you do not enter the area of buying second residential house property in your own name. Better it would be if you exercise the option of buying second residential house property in the names of other family members who have no residential house property of their own.
If however, the second residential house property is purchased mainly by taking loan then it would be a good tax planning proposition because the entire interest on loan so paid would be deducted from the Annual Value which would be subjected to tax. However, if the second house property is purchased with loan then it still makes sense to buy the second residential property in your name specially if you would like it to be rented out.