Income Tax Benefit on Second Home Loan – Complete Guide

There can be many reasons for you to buy a second home that may include using it as a holiday home, gaining rental income, using it as an investment for capital appreciation or diversifying your investment portfolio. Whatever is the reason, you may have to take a home loan to fund your second house. Therefore, it is important that you understand all tax implications and how you can avail income tax benefit on second home loan in various scenarios.

Classification of House Properties

Self-Occupied House

As per Indian tax laws, if a person just owns one house, it can be considered self-occupied if it satisfies following conditions:

  1. The house is occupied by owner and his family for the purpose of residence.
  2. The house is not rented out for whole or part of the respective financial year.
  3. The owner does not derive any income or monetary benefit from the house.

If an individual has two properties, he can decide which property to be declared as self-occupied provided it satisfies the above criteria.

Let Out Property

If a person owns multiple residential properties, any one property can be considered as self-occupied and other properties will be deemed as let out. So, if an individual has two houses, he can declare one as self-occupied and the second house will be deemed as rented out even if it is lying vacant. The rent is taken as maximum of the following:

  1. Actual rent received from the house,
  2. Probable rent that could be received for the house as estimated by the local society or a certified valuer,
  3. Fair Value of Rent for similar properties in the locality

Income Tax benefit on Second Home Loan

As discussed above, the second house is considered as let out whether it is actually rented out or not. You have to add rental income to your total income under the head “income from house property” as per section 24 of IT Act.

Income tax benefit on second home loan is limited to only tax deduction on interest repayment under section 24. You cannot claim any deduction on principal repayment. Under income from house property, you can claim the following deductions:

  1. Property Tax – Municipal taxes (property tax) paid during the financial year can be claimed, irrespective of the year for which the tax is paid.
  2. Repair & Maintenance Allowance – After deducting property tax from the total income from house property, a flat deduction of 30% (a fixed allowance for repair & maintenance) is allowed,
  3. Interest Repayment – For second home, you can claim deduction on the entire interest repayment amount without any limit.

income-tax-benefit-on-second-home-loan

Some Important points

Under Construction Property – If your second house is an under construction property, you cannot claim income tax benefit until your house is completed. Once you receive completion/ possession certificate, you can claim the interest paid during construction (IDC) over 5 years after completion i.e. 20% every year.

Wealth Tax – As per Wealth Tax Act, you can hold one property as self-occupied which is exempted from wealth tax. You will have to pay 1% wealth tax if your net wealth exceeds Rs. 30 lakhs after deducting any loans and liabilities. But, if your second house is rented out for more than 300 days in an year, it will be exempted from wealth tax.

Provisions for handling loss from Income from House Property – Subsequent to the deductions allowed under income from house property, if you are making a loss, then the loss shall be set off in the following manner:

  • Set off any loss due to second house property from other properties,
  • If some loss still exists, then the rest can be set off from the total income in the year that includes salary income, capital gains or income from business or any other profession,
  • If some loss still exists, then the balance loss can be carried forward and adjusted upto 8 years. However, such loss can only be adjusted against income from the house property.

Calculation of Taxable Income – An Example

Let us consider the example of Amit Chhabra, a manager in an automobile company in Ahmedabad who earns an annual salary of Rs. 15 lakhs. He owns two houses, one in Mumbai and the other in Ahmedabad. The house in Ahmedabad is self-occupied and the Mumbai house is rented out at a monthly rent of Rs. 20,000. His Ahmedabad house is fully paid up while he has taken a home loan of Rs. 50 lakh for his Mumbai house. For the first year his interest repayment is Rs. 5,46,306 and he has paid a property tax of Rs. 15,000 on the property.

Calculation of taxable income for Amit, considering his home loan for his second house, would be as follows:

Salary Income         15,00,000
Income From House Property          (3,88,896)
       Rental Income         2,40,000
            Property Tax         (15,000)
        Property Income after Property Tax         2,25,000
            Maintenance Allowance (30%)         (67,500)
            Interest Repayment      (5,46,396)
        Net Income from House Property      (3,88,896)
Taxable Income           11,11,104

Please note that there is no deduction allowed on principal amount on second home loan.

Can I always claim tax benefit on Second Home Loan?

No. There is no tax benefit on second home loan under these scenarios:

  1. If the rental income exceeds the deductions of property tax, maintenance allowance and the interest repayment,
  2. Once the home loan is completely paid, there will be no interest on second home loan and hence no tax benefit.

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6 comments

  1. I have a flat in my hometown and I am planning to buy a second flat in Bangalore. However I work in Mumbai. In this case, will I be able to claim HRA as well as the tax benefits on my first and second homes? Please advise.

    Also, if you can help me maximize the tax benefit (hometown flat is half the value of Bangalore’s)

    Thanks,
    Reddy

  2. I have taken Loan against three different properties which are under-construction right now and I am currently paying Pre-EMI for all three.
    Property-1 Loan taken FY-10-11
    Property-2 Loan taken FY-13-14
    Property-3 Loan taken FY-13-14

    Expected date for completion of properties / possession is Jun 2016 (FY 2016-17)
    Please guide can I avail tax benefit under section 24 and how much?

  3. I alongwith my wife(also working) purchased a 2BHK flat at Bahadurgarh in 2008 with home loan which has already been paid in 2012. We live in delhi and have purchased a flat jointly at delhi in 2015 which is going to be completed in Jan/feb 2016. I had taken a home loan of 71 lakhs. I have kept my bahadurgarh residence vacant since only Rs 5500 is the rental value there. I live on rent in delhi and will shift to my own home in delhi soon.
    Please clarify the following:-
    (a) Whether I can claim interest on recently purchased flat at delhi alongwith with my wife.
    (b) If yes, can the notional rental value of bahadurgarh flat be divided between both of us for tax purpose.
    (c) Can we get the HRA exemption on the rent which we are paying now till date of completion of the flat in delhi by Jan/Feb 2016.

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