Second Home Loan Tax Benefit in India

Exploring the second home loan tax benefit can be a game-changer for homeowners. If you’re considering a second property, understanding these benefits is crucial. Not only does a second home represent a significant asset, but it also offers potential tax advantages. Let’s unpack the essentials of the second home loan tax benefit, helping you navigate through the financial aspects of owning a second home with ease.

Home Loan Tax Benefit for Second Home 

People who own two homes are eligible for a wide range of second home loan tax benefits. Let’s examine these advantages in greater detail and the income tax benefit for a second home loan in the same city.

1. Self-Occupying the Second Home

• If you own more than one residential property for your use, one of the properties will be considered to be self-occupied, and its annual value will be zero, as is explicitly stated in the Income Tax Act requirements. 
• According to the provisions, the other location will be regarded as a rental and a speculative rent, which will be taxed as “Income from House Property.”

2. Examining The Vacant Property’s Tax Effects

• You can opt to treat one of the two “Self-Occupied Properties” (SOP) if you own more than one. According to the Act, the remaining home(s) will be regarded as “Deemed Let-Out Property” (DLOP). 
• One of your homes is a rental property if it is a DLOP. Consequently, the taxable income will increase by the notional rental amount.  

• The assessed annual rent will be considered when determining the income tax benefit on a second home loan under construction because the benefit of a self-occupied asset can only be used for one dwelling. For general upkeep and repair, a flat 30% refund is available.

3. Renting/Leasing the Second House

If you buy a second home to rent or lease, the actual rent you receive will be considered part of your taxable income, subject to certain restrictions.

4. Deduction for Municipal Taxes

In a fiscal year in which such taxes are paid, the taxes paid to the local government, namely the municipal taxes, are allowed as a second home loan tax benefit in India. 

It doesn’t matter if these taxes apply to the current fiscal year or the one preceding it.

5. Deducting for Maintenance, Repair, and Renovation Purposes 

• Tax benefits on second home loans under construction will be available for five years; 20% of the interest that must be paid during the pre-construction phase will be eligible for deductions.
• Additionally, a sum similar to 30% of the home’s yearly appreciated worth is allowed. This is because a certain sum must be set aside for remodelling, routine maintenance, and other repairs. 
• It’s vital to remember that the 30% deduction is a fixed percentage rather than based on specific costs. You may only claim this 30% of your expenses, not more, regardless of how much you have spent.

6. The real interest paid mortgage interest tax deduction second home 

● Regardless of whether your second property is deemed to be let out or is substantially let out. Contrarily, in the case of a self-occupied home, the second housing loan tax benefits India with maximum interest on a mortgage is capped at INR 1.5 lacs per year (INR 2 lacs starting in AY 2015–2016), subject to certain restrictions.

On a cautionary note, it must be noted that if you have already paid your mortgage in total, there won’t be any such tax benefit.

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Advice for Seasoned Home Buyers

Do you have second thoughts about making an offer on your vacation home in this hot market? It’s likely to grow into a reliable investment or your retirement residence. Taking pride in your home-buying experience is not appropriate. Real estate is a constantly fluctuating market, and trends and price fluctuations are always jarring and abrupt. Before purchasing a second home, keep the following in mind for income tax exemption on second housing loan interest:

● Learn about the neighbourhood and be sure of your purchase goal, whether for tax advantages, an investment, or a house for your later years.

● Assess the home’s actual rental feasibility if you intend to rent or lease it. Additionally, ensure the location fulfils the tenants’ expectations and ask the neighbourhood or resident organisation for additional information.

● Obtain an estimation of all potential costs. Are you still making payments on your first home’s mortgage? Then, confirm that you qualify for the required amount. For second-time purchasers, different interest rate regulations may apply. Some banks demand a larger down payment from such clients. Just be sure you can afford both of them comfortably.

How is a Second Home Taxed?

When you invest in a second home and take out a loan for it, understanding the tax implications is crucial. The Indian Income Tax Act, of 1961, offers specific benefits for second home loans, primarily categorised under two sections: Section 80C for the principal amount and Section 24(b) for the interest paid. Let’s explore these in different scenarios.

Scenario 1: Principal Amount Deduction

Under Section 80C, you are entitled to a deduction on the principal repayment of your second home loan. The annual ceiling for this deduction is Rs. 1.5 lakh. However, this limit encompasses any home loan principal repayments, including those for your first home. For instance, if you’re paying Rs. 1.1 lakh for your first home and Rs. 1.3 lakh for your second, the total deduction you can claim will be capped at Rs. 1.5 lakh.

Scenario 2: Interest Deduction on Self-Occupied Properties

The tax treatment varies based on the occupancy status of your properties. If both your homes are self-occupied, from the assessment year 2020-21 onwards, both are treated as self-occupied for tax purposes. Here, the deduction limit for the interest component on your second home loan is as follows:

• For loans taken on or after April 1, 1999, for construction or acquisition, the limit is Rs. 2,00,000.
• For loans taken for repairs (post-April 1, 1999) or any purpose before April 1, 1999, the limit is Rs. 30,000.

Note that these limits include the interest on your first home loan as well.

Scenario 3: Interest Deduction on Let-Out Properties

If both homes are rented out, the rental income is taxable. However, you can claim a deduction on the actual interest paid on your second home loan. This income tax rebate for a second home loan applies regardless of the loan’s purpose (acquisition, construction, repair, or reconstruction) and is available under both the old and new tax regimes.

Scenario 4: Mixed Occupancy

In a situation where your first home is self-occupied and the second is rented out, the rental income is taxable. Nonetheless, you can avail deductions on both the principal and interest components of your second home loan, similar to the benefits in the second scenario.

It’s important to remember that these tax benefits are primarily available under the old tax regime. If you’re considering the new tax regime, it’s essential to verify the availability of these deductions. Often, sticking with the old tax regime can maximise your benefits from a second home loan.

Procedure to Claim Second Home Loan Tax Benefits

Claiming tax benefits on a second home loan in India involves a few straightforward steps. Here’s a quick guide to help you through the process:

1. Calculate Deductible Amounts: First, determine the amounts you can deduct. This includes both the principal and the interest paid on your second home loan. You can use an online tax calculator or do this calculation manually.

2. Obtain Home Loan Interest Certificates: Request separate interest certificates for both your first and second home loans from your respective lenders. These certificates should clearly state the amount of interest paid during the financial year.

3. Submit Necessary Documents:

• For TDS Adjustment: Provide these interest certificates to your employer. This will help in adjusting your Tax Deducted at Source (TDS), reducing the tax that is deducted from your salary.
• For Income Tax Return (ITR): Include these interest certificates and the details of your deductions when filing your Income Tax Return. This is important for claiming your two home loan income tax benefit accurately.

Remember, these steps are crucial to ensure you receive the appropriate tax benefits for your second home loan. Keep all relevant documents handy for a smooth and hassle-free claim process.These days, bidding wars between developers and potential buyers frequently occur in popular locations close to cities. While you might not be able to take Section 80C deductions on the loan’s principal amount in the instance of your second home, you might get an income tax rebate on a second home loan. If you need help understanding property taxes, you must consult the tax and real estate experts at NoBroker! Please leave a comment below this article if you’re interested, our executives will be in touch soon.

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