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Tax Benefits on Second Home Loan: A Complete Guide

  • Highlights

  • Your second home loan offers numerous tax benefits

  • Rent income is fully taxable in case one house is on rent

  • Claim interest paid on second home loan in full

  • House not on rent is taxable under assumed rental income

The purchase of a second home can enhance the value of your investment portfolio. Besides, you can use your second home to generate income by letting it out. However, before you buy a home with the view of increasing your cash flow, be aware of the tax rules that you have to abide by when you use a loan to purchase it. Once you have understood these tax exemptions, you can easily purchase a home by taking a Home Loan at nominal interest from Bajaj Finserv. Don’t forget to use the home loan EMI calculator to calculate the affordability of your home loan.

Keep in mind that tax rules change depending on the purpose that you use the second home for. Read on to know about the various scenarios of claiming tax benefits on second home loan.

Rules in case one house is on rent

It is important to note that when you purchase a second property using a home loan, and have one of the two on rent, as per the tax rules cited under the Indian Income Tax Act, the rental income you receive is taxable. But, this does not mean your rental income in entirety is taxable. You can deduct the rent your tenants pay from the amount you spend to get the home ready. This includes all the maintenance charges, repairing costs, cost of installing new parts or fixtures, etc.

Read Also: Home loan Tax Exemptions and Benefits

As per the deduction under Section 80 C and 24, you will be eligible to claim exemptions of up to Rs.1.5 lakh Rs.2 lakh respectively towards your home loan principal and interest repayment on your self-occupied property. But, in case of your second house, you cannot seek deductions towards the principal repayment. You can only benefit from deductions towards interest repayment, which to make your claims easy, comes with no cap and is regardless of the construction status of the property.

Tax Benefits on a Home Loan

Rules in case both houses are on rent

Say you want to double your gains by putting both your properties on rent. You can also do this when you shift out of the country to settle abroad or when you live with your parents. Here, your total rental income (from both homes) is considered taxable. However, the good part is that the amount you repay as interest on the home loan for both these properties will be eligible for complete interest deductions under Section 24 of the Income Tax Act.

Rules in case none of the houses are on rent

You can choose not to put any of your properties on rent after purchase. In case you decide do so, remember that under the Income Tax Act you may have as many properties in your name, but government only considers one to be your ‘self-occupied’ property. The other houses in your name are categorised as ‘Deemed rented out’, and you can decide the property which you want to feature in this category. Here, the assumed rent income from that property will be considered as your taxable income. The amount is decided based on the property rent rates of that area suitable for your property.

If you buy a home loan insurance cover for your second home, then you can claim that to get a deduction on the premium you pay under Section 80C of the Income Tax Act. Apart from this, in case you have a co-borrower, then the rent allowance gets added to both of your taxable income based on the ownership each of you legally have. Other than that, all other tax benefits on second home loan remain the same.

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