Tax Benefits of Home Loan on your Second Home - Home Loan Blog - Tata Capital

Home Loan

Did You Know Buying a Second Home Can Save You Tax?

Mar 08, 2017

There are plenty of reasons why you may want a second home, and the good news is that you no longer need to be super rich to afford one. If you are hesitant about the financing options, you don't have to be. Instead of being bogged down with the thought of additional EMI payments, you would actually benefit in terms of tax exemptions. Let's try to understand this a little better by examining different relevant scenarios.

If you have taken a loan on your first house, should you take out a loan on the second property as well?

Let me share some of my learnings with you. To begin with, say you are living in a house that you bought on loan. As we all are aware, in this case, the principal amount repaid up to 1 lakh will qualify for deduction under Section 80C of the Income Tax Act, 1961, while up to 1.5 lakhs of interest paid will be tax-deductible under Section 24(b). Now, if you decide to purchase a second property by taking out another loan, you will still be eligible for deductions not on the principal amount but on the interest payments. The good news here is that there is no cap of 1.5 lakhs, or any other amount. In other words, if you are paying an interest of about 5 lakhs, then this entire amount will be eligible for tax deduction, given the prescribed formula.

Not convinced yet? No problem, this second scenario is sure to convince you to loosen your purse strings.

Say you live in Mumbai, but decide to pick up a property in your hometown, Pune, for its sentimental value. Now, it's obvious you will not stay there. So, you decide to rent it out for a certain amount. This second property will be considered as the "let out" house. Let's assume after the municipal tax deductions, you earn 1.5 lakhs as rent from your second property, which would be considered as its annual value. Since a standard deduction of 30% is allowed on the let out property, the amount will work out to be INR 45000. Moreover, let's assume you are paying Rs.1.4 lakhs as interest on the loan taken for second house. So, when you do the math, you will actually benefit by INR 35,000. Complicated? The below mentioned example will help you understand this concept better.

  1. Rented Income: INR 1,50,000 per annum
  2. Standard Deduction @ 30%: INR 45000
  3. Interest paid on loan: INR 1,40,000
  4. Income from the second house: INR 35,000.

In short, you will be able to claim tax benefits of INR 35000 when filing for returns!

There are a few more things that you need to keep in mind before you can fully realize the benefits of tax exemption on your second home.

  1. What if the house is self-occupied?

    Income Tax 1967 states that if you possess more than one house, then on the one that you declare as self-occupied, its annual income will be considered as nil. Also, the second property's rent value will be considered for taxation purposes. Therefore, if you declare your second house as a rented property, then whatever you earn in terms of rental income will be subject to taxation.
  2. What if you keep your second house vacant and don't rent it out?
    If you have not declared your second property as self-occupied and have not rented it out, then despite of not earning any rental income on it, it will be considered as "deemed let out property". In such a scenario, the notional rent, the income that you would have earned had you rented out the house, on the vacant property will be assessed and the same will be taxable. Moreover, second homes will allow you to claim a 30% deduction for all the maintenance and repair charges.
  3. What if your second house is an under-construction property?
    If you decide to invest in an under construction residential property, then 20% of the total interest that is to be paid during the preconstruction phase will be allowed as tax deduction. However, this tax benefit on pre-construction house is available for a maximum of five years.
  4. What will be the tax implication if you decide to rent out your second home as well as your first property?
    If you decide to rent out all your houses, then the rental income that you will receive from these properties will be subject to taxation. Also, a full deduction on the amount that is to be paid as interest on the corresponding home loans will be allowed, thus helping you save a significant amount.
    Thus, investing in a second home can prove to be a beneficial proposition both in terms of tax benefits and from an investment perspective, so it's something you should consider for sure!