Buying a house is a big event and when it is buying a second home it becomes even more exciting. In India buying a home has a lot of emotional attachment and on the other hand, it is considered to be one of the best investments. This is the reason more and more Indians are going for a home purchase. In all this home loans have proved to be a great rescuer for the home buyers as they not only fund your home purchase but also provide you tax benefits which proves to be a great relief while paying taxes every financial year.
Nowadays it’s very common to own more than one house, some do this for investment purposes while others due to change of work town and relocation. However, few leave it idle while others put it on rent and make money from it. But there are many questions related to second home purchase that remain unanswered for many. So, if you are planning to buy your second house and have some questions related to it then you are in the right place.
The first and the most common question which arises is- can one get a second home loan? Also, can a second home buyer claim tax benefit on his/her second home loan?
Well, the answer is yes! An individual can take a second home loan and he/she is also eligible to claim tax benefits on the second home loan.
Tax Benefits on a Second Home Loan
Deductions under section 80C
A home loan repayment consists of two components- principal and interest. And tax benefits can be claimed on both components. On principal repayment, one can obtain a maximum deduction of ₹ 1.5 lakh under section 80C on the Income-tax act. The same deduction is applicable even on the second home loan. However, it does not matter if the house is self-occupied or rented.
But before you claim this you need to remember that the 80C deduction also includes investments like life PPF, ELSS etc. and you can claim a total of 1.5 Lakh deduction under this section.
To know tax benefits on second home loans we need to understand the two types of house property- Self-Occupied Property (SOP) and Let-Out Property.
SOP- Property that a homeowner uses for his/her own residence is known as self-occupied property (SOP), while the second property which belongs to them is considered as let-out property i.e the rented one. But from Budget 2019, you can consider your second house as self-occupied. So, now you can show up to two houses as self-occupied.
Tax benefit on the Interest Component
If a property is self-occupied then the gross annual income from it will be considered NIL as per Section 23. When considering the home loan tax benefit for a second home, after deductions available on the principal component we need to consider the deduction available on the interest component of the repayment. However, in general, the deduction available on the interest component can be availed under section 24 of the Indian Income-tax act. Well, if you own only one house, you can claim a maximum deduction of ₹ 2 lakh on repayment made towards the interest component. While if the second property is let out there is no upper limit on claiming interest as a deduction. But now you can also consider your second house as self-occupied. So, let us consider second home loan tax benefits under two different conditions.
The first home is self-occupied, and the second home is vacant
In this case, the second property cannot be deemed let out, and hence both the properties are considered self-occupied. And deduction which can be claimed on interest claimed on both houses cannot exceed ₹ 2 lakh.
The first home is self-occupied and the second is on rent
In this case, the owner needs to declare the rental income from the second property in his/her gross income. Now from the total he/she can deduct the standard deduction of 30 per cent, interest on the loan (without any upper limit) and the municipal taxes paid.
This was all about tax benefits on a second home loan. Hope it will be helpful for you.