Applying for a home loan is one of your most important financial decisions. It is a viable solution to get the funds you need to buy your dream home and, at the same time, enjoy a host of benefits. For example, home loan interest rates are much lower and more affordable than personal loans. Also, lenders nowadays have simple eligibility criteria and require minimal documents for a home loan.
In addition, you can borrow about 80% to 90% of the property’s value as a loan. And the best part is that you can enjoy tax benefits on home loan repayments. This is why many people in India prefer to apply for home loans to purchase or construct their homes. Since a home loan is a long-term financial commitment, many people plan to buy a second home as an investment or an additional income source.
So, if you, too, are planning to buy a second home, a second home loan can come in handy. If you are still confused, as the name says it all, a second home loan is the credit you get for buying a second home on top of the existing loan. The good thing is that home loan tax benefits are available on second home loans, too. However, the deductions you can take are quite limited.
This guide discusses everything you want to know about tax rebates on second home loans.
The Government of India allows tax benefits for second home loans under two sections of the Indian Income Tax Act, i.e., Section 80C and Section 24.
Income tax benefit on second home loans per IT Act’s Section 80C
When you pay the home loan EMI (Equated Monthly Instalments), it consists of two elements: the principal amount, which is the amount you borrowed, and the interest amount. You can use the home loan tax benefit calculator to determine the exact breakdown of the principal and interest amounts.
Under Section 80C of the Indian Income Tax Act, you can claim a tax deduction of up to Rs. 1.5 Lakh on the repayment of the principal amount every financial year until you repay the full amount. The Rs. 1.5 Lakh tax benefit deduction is applied to both the first and second home loans.
That means if your first home is active when you apply for a second one, the maximum tax deduction you can claim on the repayment of the principal amount for both loans is limited to Rs. 1.5 Lakh. You can claim the deduction under Section 80C, irrespective of whether the second house you purchase is rented out or not.
Tax exemption on the second home under Section 24 of the IT Act
While Section 80C of the Indian Income Tax Act deals with the repayment of the principal amount, Section 24 deals with the tax benefits of repaying the interest component of the home loan.
Under this section, you can claim up to Rs. 2 Lakh tax benefits in a financial year. Earlier there was no upper limit on how much tax deduction you can claim under this section if you let out the second home on rent.
However, since the 2019 budget was announced, the government revised the tax deduction limit and restricted it to only Rs. 2 Lakh, irrespective of whether the second home is rented out or self-occupied.
Let’s better understand the income tax rebate on a second home loan by using an example of two scenarios.
Scenario 1 – You don’t let either of the property on rent
Consider a situation where you live with your family in your family, i.e., you self-occupy the home, and you leave the second home vacant. Now, as per the 2019 Budget amendments, it would be considered as ‘deemed to be rented.’
In this situation, you have to consider both your houses as self-occupied and claim the interest of up to Rs. 2 Lakh on the repayment of the interest on the home loan.
Scenario 2 – You occupy one home and rent out the second home
Consider a situation where you are using the first home to live with your family, and you put the second home on rent. In this situation, the rent you get from the second home will be considered income, and it will be added to your total income under the ‘income from other sources’ heading.
So, while you file your taxes, you must show proof of your rental income from the second home and also pay the applicable taxes. Although you cannot claim a deduction on the rent you receive from your tenant, you can claim a tax benefit on the maintenance of your property, considering you have to do repair work, paint, and renovate the home.
Also, if your taxes are more than the rent income, you can claim a deduction of up to Rs. 2 Lakh against income from other sources. Lastly, if you face any loss of Rs. 2 Lakh or more, you can carry it forward for the next eight assessment years.
Final Word
The government of India provides several tax benefits on second-home loans. As a borrower, you must be aware of these benefits and take advantage of them to reduce your overall annual tax liability.
Also, if you are planning to apply for a second home loan only to receive tax benefits, it may not be wise. You must assess your financial capability and then make an informed borrowing decision.
Finally, when you are applying for a home loan, it is always a wise idea to use the home loan eligibility calculator to know the exact EMI amount you would have to pay on the amount you borrow and choose the amount accordingly. The EMI must be affordable; you should be able to repay it without compromising on your other financial obligations.
