Purchasing a house is a big event and when it is purchasing a second home it becomes even more thrilling. In India purchasing a home has a lot of emotive attachment and on the other hand, it is deliberated to be one of the best investments. This is the reason more and more Indians are going for a home buying. In all this home loans have proved to be a great rescuer for the home buyers as they not only fund home purchase but also provide individual tax benefits which proves to be a great release while paying taxes every financial year.
Now it’s very common to own more than one house, some do this for investment purposes while others due to variation 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 associated to second home purchase that remain unanswered for many.
The first and the most common question which rises is- can one get a second home loan? Likewise, 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 welfares on the second home loan.
Tax Benefits on a Second Home Loan
Deductions under section 80C
A home loan repayment contains of two components- principal and interest. And tax benefits can be claimed on both components. On principal repayment, one can get a maximum deduction of ₹ 1.5 lakh under section 80C on the Income-tax act. The same deduction is valid even on the second home loan. However, it does not matter if the house is self-occupied or rented.
But before individual claim this they need to remember that the 80C deduction also contains investments like life PPF, ELSS etc. and they 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 proprietor uses for his/her own residence is known as self-occupied property (SOP), while the second property which belongs to them is deliberated as let-out property i.e the rented one. But from Budget 2020, individual can consider their second house as self-occupied. So, now they 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 obtainable on the principal component we need to consider the deduction available on the interest component of the repayment. However, in common, the deduction accessible on the interest component can be availed under section 24 of the Indian Income-tax act. Well, if individual own only one house, they 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 they can also consider their second house as self-occupied. So, let us consider second home loan tax welfares under two diverse conditions.
The first home is self-occupied, and the second home is vacant
In this situation, the second property cannot be deemed let out, and henceforth 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 situation, 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 %, interest on the loan and the municipal taxes paid.
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