Tax Benefit on Second Home Loan
A frequent question that arises in the mind of homeowners is who can claim tax benefits on a second home loan. As per banking laws, there are no restrictions on the number of home loans a person can take. To understand the taxability of property better, you need to know the two components of house property: Self Occupied Property (SOP) and Let Out Property (LOP).
The residential property that you currently reside in is called Self-Occupied Property. In contrast, the other residential properties you do not live in are called Let Out Property or rented properties. Now, they may not be rented out, but they are still considered “deemed to be let out” and are, hence, taxed.
Regarding the tax benefits on a second home loan, its repayments comprise of two parts: the principal component and the interest component. Under Section 80C of the Income Tax Act, tax is deductible only up to Rs. 1.5 lacs, regardless of the number of houses you have bought on loan.
While deductions under Section 80C on the principal amount of the loan may not be available in the case of your second house, you can enjoy tax benefits on the interest component. Also, you must note that Section 80C deduction also includes investments like life PPF, ELSS, etc. You can claim this deduction on more than one house property. Here, it does not matter whether the property is self-occupied or rented.
Tax Benefits Under Section 24
The tax benefits that can be claimed on the interest component are a part of Section 24. Changes after the Budget in 2019 state that even if you have a loan on two houses, the maximum tax benefit you can receive is up to Rs. 2 lacs. Here, even if the second property is rented out, it will still be considered as a Self-Occupied Property.
How does Taxation of Second Home Work?
Let’s consider two examples to understand this better:
First, suppose your first house is self-occupied, while the second house is vacant. The second home will not be deemed to be let out. Hence, you will only be able to claim tax reductions up to a total of Rs. 2 lacs on both properties.
Secondly, suppose your first home is self-occupied and the second home is rented out. You will have to declare the rental income of the second property. From that income, you can deduct the standard deduction of 30%, interest on the loan (without any upper limit), and the municipal taxes paid. You can also claim up to Rs 2 lakh against other income sources. Any loss above Rs 2 lakh can be carried forward for the next eight assessment years.
Buying a second home can serve multiple purposes, such as a holiday home, an investment or a way to diversify your portfolio. Attractive tax benefits on multiple home loans, when treated as self-occupied, can attract nil taxability. Therefore, whenever you are considering taking a home loan, it is also important to consider its taxable aspects.
Frequently Asked Questions Expand All
On taking a second home loan, one can avail up to Rs. 2 lacs in tax benefits on the total interest on both the home properties. If you have rented out the second home, you have to declare your rental income and can deduct 30% interest on the loan and other municipal taxes as a part of your tax benefits.
Considering the tax benefits, a second home loan can certainly be an effective tax-saving tool. However, with the given restrictive ceilings imposed by law, the benefits may not translate into significant savings. Taking home loans simply to save tax may not be the best idea because your expectations of tax savings may not be completely fulfilled. Tax deductions can surely be an added benefit of taking a home loan but cannot be the sole reason you should take one.
Yes, the interest on the 2nd home mortgage is deductible. Here, both the properties you own will be considered self-occupied (even if they are not), and you can earn benefits up to Rs. 2 lacs on both properties.
Yes, the law allows for an individual to avail of two home loans at the same time, given they can repay the loans, along with the taxes and other charges. Factors like your CIBIL score, your fixed income, age, work profile, LTV (Loan to Value) Ratios will be considered before sanctioning the loan.