Financial Planning
Is investing in a vacation home a smart financial decision?
Key takeaways
- Check if you can afford it without stretching your finances.
- Consider how often you’ll use it — renting might be an option if it’s not frequent.
- Look at potential returns compared to other investments.
- Remember extra costs like maintenance and taxes.
Buying a vacation home sounds amazing, right? Imagine having your own place by the beach or up in the hills, somewhere you can just pack a bag and head off to whenever you need a break. Not only that, it can act as a second source of income, and a property that could appreciate over time.
But beyond the dream, there’s a bigger question you should ask yourself:
Is buying a vacation home really a smart financial move?
Let’s find out.
How to evaluate if it is financially smart for you
A vacation home is basically a second house you buy mainly for personal use during holidays. Sometimes, people also rent it out when they aren’t using it.
It’s different from your primary home — you don’t live there all year.
Before making a decision, you must carefully assess your financial position. A vacation home should not compromise your core financial stability.
Here are a few questions to ask:
- Can you comfortably manage two EMIs?
If you already have a home loan, taking a second loan could strain your monthly budget. - Is your emergency fund strong enough?
Maintaining an emergency fund that covers six months' expenses is important before taking on another property. - Have you planned for other life goals?
Expenses like children's education, retirement savings, and healthcare must not be compromised for a vacation home. - Will you use the property enough?
If the vacation home will be used only once or twice a year, renting might be a smarter alternative.
Suppose you are earning ₹20 lakh per year and have an existing home loan EMI of ₹30,000 per month. Adding another EMI of ₹25,000 for a vacation property could limit your flexibility for future expenses. Evaluating these aspects in advance can prevent regrets later.
Return on investment
It is important to consider the return on investment (ROI) you expect from a vacation home and compare it to other investment avenues.
Vacation Home ROI:
- Appreciation: Properties in popular tourist areas such as Goa, Lonavala, or Shimla often appreciate by 5–8% per year.
- Rental Income: Short-term rentals can offer additional returns of 2–4% annually, depending on demand and location.
Example:
If you invest ₹50 lakhs in a vacation home and it appreciates at 8% annually, the property value could grow to around ₹73.4 lakhs in five years.
If you invest the same amount in Gold and it appreciates at 7% annually, it could grow to around ₹70 lakh in five years. In a fixed deposit at 6% annually, your FD could grow to ₹67.3 lakh in five years.
Unlike FDs or Gold, where returns are purely financial, a vacation home gives you memorable life experiences alongside wealth creation. It is important to note that the returns mentioned here are assumed and will vary based on multiple factors. So, it’s important to do the research at individual level or higher a financial advisor for the same.
Other hidden costs people forget
Buying the vacation home is just the beginning. Several recurring and one-time costs often surprise new owners.
- Property management fees: If you are not living near the property, you might need to hire a property management company to handle maintenance and rentals.
- Association fees: Many vacation homes, especially in gated communities, come with annual maintenance fees.
- Repairs and maintenance: Weather damage, pest control, and general repairs can cost ₹20,000 to ₹50,000 annually or more, depending on the property's condition.
- Insurance premiums: Second homes often attract higher insurance premiums. Flood-prone or disaster-prone areas can drive premiums even higher.
- Higher property taxes: Vacation homes are sometimes taxed at a higher rate, depending on local regulations.
Example: Suppose you buy a ₹50 lakh property. You might end up paying ₹15,000 per year in property tax, ₹20,000 in maintenance, and ₹15,000 for insurance. That is ₹50,000 annually, excluding repairs.
Ignoring these expenses can turn an expected profit into a burden over time.
Tax benefits on a vacation home
Owning a second home does offer certain tax benefits in India, although the rules are slightly different from those for a self-occupied home.
Here’s how:
1. Deduction on Home Loan Interest
Under Section 24(b) of the Income Tax Act, you can claim a deduction of interest paid on a loan for your second home.
- If the house is let out (given on rent), there is no upper limit on the deduction you can claim on interest paid.
- However, if you keep the house vacant for personal use, the deduction on interest payment is capped at ₹2 lakhs per year (just like a self-occupied home).
2. Standard Deduction on Rental Income
If you rent out the vacation home, the rental income will be taxable. However, you are allowed to claim a standard deduction of 30% on the rental income for repairs and maintenance under Section 24(a).
This helps reduce your taxable income and makes the rental option financially attractive.
3. Principal Repayment Deduction
The principal portion of the EMI you pay for the home loan on your second house is eligible for deduction under Section 80C, subject to the overall limit of ₹1.5 lakhs. However, remember that this limit includes other 80C investments too, like life insurance premiums, PF contributions, and ELSS.
4. Capital Gains Tax on Sale
If you decide to sell the vacation home later:
- If you hold it for more than 24 months, it qualifies as a long-term capital asset, and the gains are taxed at 20% after indexation benefits.
- If sold before 24 months, the gain is taxed as short-term capital gain at your applicable income tax slab rate.
You can also claim exemptions under Sections 54 or 54F by investing the gains into another residential property, under specific conditions.
Conclusion: Should you invest?
Investing in a vacation home can be rewarding if planned carefully. It offers personal joy, rental income, and potential appreciation. However, it is important to evaluate whether it fits your financial goals, liquidity needs, and risk appetite.
A vacation home is not only an investment; it is also a responsibility. Factoring in all costs, comparing returns with other options, and thinking realistically about usage are key steps before making the decision.
Buying a vacation home may be a smart move but only if it aligns with your broader financial planning and long-term vision.
Disclaimer: This article is intended solely for
informational purposes. The views expressed in this article are personal. Axis
Bank and/or the author shall not be liable for any direct or indirect loss or
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