Tax Benefit on Second Home Loan in India

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For many Indians, owning a home is a major life goal, and a home loan lets them make this dream into reality. Home loans are equally useful if you wish to get a holiday home as you can apply for a second home loan.

Like on your first loan, you can avail of certain tax benefits on the second home loan and ease the burden of its repayment. Prior to 2020, individuals with two houses were allowed to claim tax benefits on the home loan repayment of self-occupied houses.

So, the owner would have to pay taxes on income generated from rent from the property. Now, as per the new rules, you can avail of a tax rebate on a second home loan too.

Read on to know everything that you need to know about the income tax benefits on a second home loan.

How Does Taxation of a Second Home Loan Work?

To know about how taxes are applicable on a second home loan, you first need to know about two components of residential properties.

These are Self-occupied Properties (SOP) and Let Out Properties.

Self-Occupied Property: A property that you own and use as your residence
Let Out Property: Let out property is the house that you own but have rented it. Even if you do not rent it, it would be considered Let Out Property and taxed accordingly

A Self-Occupied Property does not attract any taxes as its annual value is considered to be nil. However, the income earned in the form of rent is taxable under Section 22 of the Income Tax Act.

In case you have two properties both of which you are not using for residential purposes, both properties will be taxable.

What are the Tax Benefits on a Home Loan for a Second Home?

As discussed, you can avail of income tax benefits on a second home loan too as per the new rules.

Here are various tax exemptions on a second home loan you can under the following sections of the Income Tax Act of 1961:

1. Section 24(b) of the Income Tax Act, 1961

Tax benefits of up to ₹2 Lakhs can be claimed on the interest paid as repayment on the property that is declared self-occupied.

Complete interest paid can be claimed as tax benefits on the interest paid as repayment on let-out property.

2. Section 80C of the Income Tax Act, 1961

A maximum permissible limit of up to ₹1.5 Lakhs as tax benefits on the principal loan amount repayment, including registration fees and stamp duty.
If you start a second loan over an active home loan, you will be able to claim a maximum tax deduction of up to ₹1.5 Lakhs in a year

These income tax benefits are applicable to persons and not properties. So, if you apply for a joint home loan, each owner of the house can separately claim income tax benefits on 2nd home loan.

However, it is subject to the actual payment incurred in relation to the principal and interest. To under the income tax rebate for a second home loan, consider the following two scenarios.

Scenario 1: First home is self-Occupied and the other house is vacant

In such a case, the second home cannot be deemed let out. As a result, both houses can be tagged as self-occupied, and the total interest claimed shall not exceed ₹2 Lakhs considering both homes.

Scenario 2: First Home is Self-Occupied and the other house is on rent

In this case, the rental income of the second property should be declared. You can claim up to 30% income tax exemption on second housing loan interest along with the total municipal taxes paid, irrespective of limits.

You can also claim up to ₹2 Lakhs against other income sources. All losses above this amount will be carried forward for the next eight assessment years.

Procedure to Claim Tax Benefits on Second Home Loan

Here is a detailed procedure to claim income tax benefits on 2nd home loan:

Firstly, ensure that both the home loans are in your name or you are a co-owner if it is a joint home loan
To save time and unnecessary hassles in the future, calculate the tax rebate on a second home loan in advance. For this, you can make use of the home loan tax benefit calculator which is completely free and available online.
To adjust your TDS calculation, submit your home loan interest certificate to your employer. If you fail to do so, it will result in a recurring deduction of TDS from your salary. Also, you may be asked to submit your home loan sanction letter.
If you forgot to submit your home loan interest certificate, you will have to file income tax returns to claim the housing loan tax benefits for the second house.

Key Point on Tax Benefits for Second Home Loan

In order to avail of tax benefits on a second home loan, you must know about the following key points:

Second Home as Self-Occupying Property

If you have two residential properties both of which serve as your home, you will then have to pick one of those as self-occupied. The let-out property will be taxed as per the Income Tax Act provisions.

Taxation on the Vacant Property

If you have two self-occupied properties, you will have to choose one of them. The other will be designated as Deemed Let Out Property (DLOP) and attract taxation on speculative rental income. However, you can claim a tax rebate of a flat 30% for maintenance and upkeep.

Second Home as a Holiday Home

As you can designate only one property as self-occupied, the speculative rent of the other property will be taxed accordingly.

Second Home as Let Out Property

If you rent or lease the second home, the property rent would be taxable as per the Income Tax rules.

Deduction for Municipal Taxes

Taxes for services to the local authorities, like municipal taxes, are permitted to be calculated as deductions.

Deduction for Maintenance and Repairing:

Tax deductions of up to 30% of the appreciated value of the second home are allowed as deductions. This is because some amount needs to be set aside for maintenance, renovation, repair, etc.

Deduction on Interest

Regardless of the fact that it is a self-occupied or let out property, you can claim tax benefits on home loan interest of up to ₹1.5 Lakhs in a year.

A second home could become your holiday property, a source of income, a nostalgic ode to your hometown, and many more. Whatever the reason may be, you can consider taking a second home loan to finance another nest for your family.

With a second home loan, you can also enjoy the tax deductions available. On the other hand, if you have an existing loan, you can avail of the Home Loan Balance Transfer to shift your loan to get lower interest rates.

You can use a home loan EMI calculator to determine the best available interest rates for you. However, remember that the offered interest rates depend on various factors such as your CIBIL score, your income, and your ability to repay the loan.

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How does taxation of a second home work?

In the Union Budget 2019-20, the Union Government made significant changes regarding the tax exemption on second home loans. As per the new norms, a house owner can declare two houses as self-occupied.

So, an owner can enjoy the benefits of the second home interest deduction in addition to the first home interest deduction.

Under Section 24(b), the complete interest paid can be claimed as tax benefits on the interest repayment on the second property.

Can a person have multiple home loans in their name in India?

Yes, you can take multiple home loans in your name as there is no bar in the number of loans you can avail of.

Are there any tax benefits for owning two homes in India?

Under Section 80C of the Income Tax Act of 1961, you can claim tax exemption on a second home loan interest component of up to ₹1.5 Lakhs. Moreover, as per Section 24 of the same act, you can also avail of tax benefits on a second home loan of up to ₹2 Lakhs.