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. Moreover, understanding the home loan benefit on second home can help you maximise tax savings and manage your finances better.
Interest deduction on home loan under New Regime
If you choose the new tax regime and take a second home loan for a property that you plan to use for your own stay, you will not get any tax relief on the interest paid. Deductions under Section 24(b) for interest and Section 80C for principal repayment are not allowed in such cases.
This means that even if you are paying a significant amount towards your second home loan, it will not reduce your taxable income under the new regime when the property is self-occupied. Therefore, your tax outgo may remain higher compared to the old regime.
However, if the second property is purchased as an investment and is rented out, you can still claim a deduction on the interest paid under Section 24(b). There is no benefit available for principal repayment under Section 80C in this scenario.
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.
How to calculate tax benefits on a second home loan?
Calculating tax benefits on a second home loan involves understanding various deductions available under the Income Tax Act. Here are the key points:
- Interest deduction: You can claim a deduction for the interest paid on the loan under Section 24(b). The maximum limit is ₹2 lakh per annum.
- Principal repayment: Under Section 80C, you can claim a deduction for the principal repayment up to ₹1.5 lakh per annum.
- Rental income: If the second home is rented out, the rental income is taxable after deducting 30% for maintenance and the interest paid on the loan.
- Vacant property: If the property is vacant, it is considered self-occupied, and you can still claim the interest deduction.
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.
When the second home loan was taken |
Purpose of the second home loan |
On or after April 1, 1999 |
Construction or acquisition of second house property |
On or after April 1, 1999 |
Repair of second house property |
Before April 1, 1999 |
Construction or acquisition of second house property |
Before April 1, 1999 |
Repair of second house property |
**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.
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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.
Procedure to claim tax benefits on second home loan
If you are unsure about how to claim tax benefits on a second home loan, follow these simple steps:
- You should be the owner or joint owner of both the first and second properties.
- Work out the total tax deduction you can claim on your second home loan in advance.
- Share your home loan approval letter with your employer.
- Submit the interest certificate issued by your lender to your employer.
- This certificate helps your employer calculate the correct TDS on your salary.
- If you do not submit it, higher TDS may be deducted without considering your loan benefits.
- In such a case, you can claim the deduction while filing your income tax return.
- Any extra TDS deducted will be refunded after your return is processed.
Example of tax benefit on second home loan
Let’s consider an example. Mr Sudhir owns a house in Kolkata and is already paying a home loan for it. Due to a job change, he moves to Chennai and decides to buy another house there with a new loan. He also rents out his Kolkata property.
Now, can he take a second home loan and claim tax benefits? Yes, he can. Mr Sudhir is eligible to claim deductions under Section 80C for principal repayment and Section 24 for interest paid, subject to applicable limits and conditions.
- Interest deductible on accrual basis: The interest can be claimed even if it has not been actually paid during the year, as long as it has been charged for that year. However, any interest charged on unpaid interest cannot be claimed as a deduction.
- Interest deductible in other cases: If the property is purchased through instalment payments agreed with the seller, the unpaid amount is treated like a loan. The interest payable on such outstanding amount can also be claimed as a deduction under Section 24(b).
Conclusion
Buying a second home can offer tax advantages if you meet the required conditions under the Income Tax Act. Ownership status and how the property is used play a key role in determining the benefits you can claim.
The total deduction you receive depends on factors such as the tax regime you select, whether the property is self-occupied or rented, and the amount of loan interest and principal you repay.
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