SECOND HOMES: TAX LIABILITY OR WEALTH CREATION

India’s real estate landscape is undergoing a transformation, with second homes emerging as a popular investment choice. What was once considered a luxury is now increasingly viewed as a strategic financial asset. A growing middle-class population with rising disposable income is fueling demand for second homes. With financial stability and aspirations for wealth creation and lifestyle upgrade, many individuals are planning investing in real estate beyond their primary residence.

Key Changes in the New Tax Regime
The new tax regime effective from April 1, 2025, has revised income tax slabs, offering more disposable income to taxpayers, that they can consider investing in buying a second home. But the question often gets asked is if rising real estate prices and LTCG rules, do make investing in real estate a smart choice?

The rebate under section 87A has been increased, allowing individuals with taxable income up to Rs 7 lakh to claim a rebate of up to Rs60,000. Also, under the new regime, up to two properties can be declared self-occupied, with nil deemed rental income. Previously, only one property could be declared self-occupied. Kumarmanglam Vijay, Partner & Head – Direct Tax, JSA Advocates & Solicitors elaborated, “Historically, taxation of deemed rent was a deterrent to owning a second home, as only one property could be treated as self-occupied, while others were deemed let-out (if not let-out) even if they were vacant.

Budget 2025 has significantly altered this landscape. Now, up to two properties can be treated as self-occupied, thereby eliminating the tax burden of notional rent on a self-occupied second home. It encourages second-home ownership without pressure to rent them out solely for tax efficiency. Moreover, the requirement to prove occupancy has been removed. This is particularly beneficial for dual income households where spouses may reside in different cities due to work. However, it’s important to note that the deduction for interest on a loan taken for acquiring a self-occupied property under Section is capped at INR 2,00,000 annually, which is otherwise allowed for let-out properties without any limits.”

Changes in Capital Gains Tax
The long-term capital gains (LTCG) tax rate on property sales has been reduced to 12.5% (from 20% earlier). However, the indexation benefit—which adjusted the purchase price for inflation—has been removed for properties bought after July 23, 2024. This means that while the tax rate is lower, the taxable gain may be higher for properties acquired after this date.

The Rental Income Taxation
While the rules around rental income remain largely unchanged, the ability to declare up to two properties as self-occupied means fewer properties are subject to the deemed rental income clause. This is particularly beneficial for investors who own multiple properties but do not rent them out. From the third home onwards, properties are treated as ‘deemed to be let out,’ and notional rental income is taxed. Capital gains exemptions are restricted for those owning multiple homes.

Second Homes for Wealth Creation
Properties in business and tourist-friendly locations can not only appreciate but also generate rental income. Holiday rental or time share platforms allow homeowners to monetize their properties effectively. With proper marketing, rental income can cover EMIs, making the investment self-sustaining.

“The shift from joint families in towns to nuclear family setups with spouses working in different cities has created a need for additional residences. Improved infrastructure and connectivity have enhanced the feasibility of owning homes in remote or leisure destinations. A stronger property rights framework and digitization of land records have also increased confidence in real estate investments, reducing the risk of ownership disputes, said Kumarmanglam Vijay.

Sushant Shetty | Partner, Fox Mandal & Associates LLP shared, “Most clients ask me whether buying a second home makes sense financially. From what I have seen, it depends a lot on timing and location. Thanks to the Budget 2025 allowance for two self-occupied homes and reinvestment in up to two properties under Section 54, appreciation often outpaces tax costs. You now get diversification under more favorable rules.

The Trillion-Dollar Leap
Second homes are no longer just lifestyle choices - they’re smart financial moves. Second homes help diversify the investment portfolio and act as a hedge against inflation. With supportive tax reforms, they offer a compelling blend of utility and wealth creation.

On the other end, you lose flexibility once money is locked in property and property growth may not beat inflation after costs and taxes. Not to forget, rental yield is still low at around 3–4% yearly and selling property will attract long term capital gains tax after 2 years.

Indeed, while investment and rental income remain top considerations, many are investing in second homes as vacation or lifestyle retreats rather than purely financial assets.