Introduction:

Rahul was thrilled when he was blessed with twins. The cuteness, excitement and frolic had doubled when he held the two babies in his arms. But with the joys, the responsibilities compounded as well. Rahul had bought a house for his family in Pune three years back for Rs 30 lakhs with the help of a home loan for 10 years. But then he had expected to have a single child. Now that he was blessed with two, Rahul thought of buying another house for his second child. This software engineer in an MNC was sure that he was eligible for another loan with his income. But would he get tax benefit on the second home loan? Let’s find out.

What Property Owners Should Know:

With easy availability of home loans and higher disposable income, buying a second home is emerging as a common trend among millennials like Rahul. But apart from the eligibility criteria for a home loan, what one must be aware of is the tax benefit on a second home loan.

The Income Tax Act has several provisions for tax benefits on 2nd home loan. As per the Act, if a person owns two house properties, then one would be considered as ‘Self Occupied Property’ while the other would be ‘Deemed As Let Out’. Value of the self-occupied property shall be regarded as zero. In contrast, the other property, even when unoccupied, will carry a notional rent which shall be taxed under the provision ‘ income from house property’.

Keeping millennials in mind and their desire for more than one house, the government allowed two properties to be considered as self-occupied in the Interim Budget 2019. This new rule came into effect from the financial year 2019-20. It allows one to claim the interest paid on home loans for two properties as tax benefit under Section 24 of the Income Tax Act. Also, it saves one from paying taxes on notional rent for houses that are unoccupied but deemed to be let out.

Section 24 for the Income Tax Act:

A home loan comprises two components:

  1. Principal amount
  2. Loan interest

While tax benefit on a second home loan is not available on the principal amount under Section 80C, one can claim deductions on interest paid for both the properties under Section 24. This amount has been capped at Rs 2 lakh in a financial year for both properties. In case one or both houses are on rent, the owner will have to disclose the amount. If the interest paid for the property is more than the rent earned, then one can claim the difference as ‘loss on house property’ for an amount of up to Rs 2 lakh against other incomes. You can carry forward losses above this amount for eight assessment years.

Other Deductions:

Apart from this, a standard deduction of 30 per cent is allowed for maintenance and renovation of properties that are let out. One can also claim the amount paid as municipal tax to the local authorities.

Conclusion:

What matters more than tax benefits is the rate of interest for the home loan for your second property. If one can negotiate a reasonable rate of interest, then it is possible to claim the whole amount of interest as tax rebate under Section 24.

Also, one should remember to declare the rent amount earned from properties that are let out. These are considered as rental income and are taxable. If one rents out both the properties, then rent collected from both will be taxed but a total deduction will be allowed on the interest paid.

Buying property has always been a lucrative investment option for years. So don’t think much, act now.