Tax benefits on second home loan – A complete guide

Buying a second home is an excellent strategy to expand your investment portfolio, and make it inflation-proof. Your second house property can be used as a family or vacation home, or you can even rent it out to tenants and generate extra income. That said, you may need to avail of a second home loan to purchase an additional house property.

Like your first borrowing, the second home loan also comes with a host of tax benefits that you can take advantage of.

Income tax benefit on second home loan

The income tax benefits on a second home loan depend on whether the property is self-occupied, deemed to be let out, or actually let out. Here are the key tax benefits for a second home loan in India:

1. Interest deduction:

• For self-occupied property: If you have taken a loan to purchase a second property that is self-occupied, you can claim a deduction on the interest paid on the loan under Section 24(b) of the Income Tax Act. The maximum deduction allowed is up to Rs. 2 lakh per financial year.
• For let out or deemed to be let out property: There is no upper limit on the interest deduction for properties that are let out or deemed to be let out. You can claim the entire interest paid on the loan as a deduction under the head "Income from House Property."7

2. Principal repayment deduction:

• Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs. 1.5 lakh on the principal repayment of the home loan for both the first and second homes.

3. Tax on notional rent:

• If you have more than one self-occupied property, as per the Income Tax Act, only one of them is treated as self-occupied for tax purposes, and the others are deemed to be let out. In such cases, even if you're not actually renting out the property, you're required to calculate the notional rent that you would have received if the property were rented out. This notional rent is then added to your taxable income. However, you can claim a standard deduction of 30% of the notional rent to account for maintenance expenses.

It is important to note that there can be complex scenarios and different rules for properties that are under construction, jointly owned, or inherited. Tax laws are subject to change, so it's recommended to consult with a tax professional or financial advisor to understand the most up-to-date and relevant tax benefits based on your specific situation.

Tax Deduction on second home loan principal amount

Under section 80C of the Income Tax Act, 1961, you get tax benefits on the home loan principal repayments made during a financial year. You can claim a maximum amount of Rs. 1.5 lakh as a deduction from your total income under this section.

So, if you are already repaying a home loan on your first house property, you must keep this limit in mind.

For example, say that the principal repayment on your first home loan is Rs. 1.1 lakh, and on your second home loan is Rs. 1.3 lakh. Your tax benefits during the financial year will be limited to a total deduction of Rs. 1.5 lakh on both these loans, as per section 80C.

Tax deduction on second home loan interest

The tax benefits on home loan interest will be applicable as per section 24(b) of the Income Tax Act, 1961. This will depend on whether your second house property is self-occupied, let-out, or deemed to be let-out. Let us look at the three possible scenarios.

Scenario 1: If the first and the second home are both self-occupied

Earlier, in case the first and second homes were self-occupied, the second house property was deemed to be let-out. However, with effect from assessment year 2020-21, the second house property is also treated as a self-occupied unit.

The limits on the tax benefits available on the interest component of the second home loan u/s 24(b) are tabulated below. Do note that if you are still repaying your first home loan, the limits specified below include the interest component on the first borrowing as well.

**This provision is unavailable for taxpayers opting for the new tax regime.

Scenario 2: If the first and the second home are both let-out

In case you have let-out both your first home and your second home, the rental income from both these units will be taxable. However, you can claim tax benefits on the actual interest component repaid on your second home loan during the financial year.

This deduction on the home loan interest for the let-out property will be applicable irrespective of the purpose of the second home loan. That is, you can avail of the loan for the house property's acquisition, construction, repair, or reconstruction. Additionally, the deduction is available for taxpayers opting for the old and the new tax regimes.

Scenario 3: If the first home is self-occupied and the second is let-out

Many people purchase a second house property to earn rental income by letting it out. If you have also employed this financial strategy, the rental income you earn from your second home will be taxable per the Income Tax Act, 1961.

That said, you can also reduce the tax burden by availing of certain tax benefits on the principal and the interest component of your second home loan. The deductions in this scenario will be the same as those discussed in the second scenario above, since your second house property is let-out for tenancy.

This sums up the tax benefits you can avail of on your second home loan as per sections 80C and 24(b) of the Income Tax Act, 1961. Remember that some of these provisions are applicable only under the old tax regime. So, if you opt for the new tax regime, you need to check whether the deductions you claim are available under the new system. That said, to make the most of the deductions available on your second home loan, opting for the old tax regime and maximising your tax benefits may be advisable.