How to claim Income Tax Benefits on Second Home Loan?
I always look for various ways to save tax as per the income tax act. My 80C is tax benefits are exhausted, interest on housing loan for self-occupied is claimed, etc., I fall in the 30 % tax bracket. I was looking other avenues to save tax. Another avenue where I am currently looking is to save tax through second housing loan tax benefits. What are the housing loan tax benefits for second house? Can we get unlimited income tax exemption from the second home loan? What are the income tax provisions relating to the second housing loan?
What is Home Loan?
We all have come across the term ‘home loan’ many a times but very few understand its meaning in respect to its importance in income tax rebate and the way it is to be dealt. Let us understand the full meaning of it.
A home loan is a loan taken by the individuals who wishes to purchase or construct a house. Home loans have emerged as an important tool to finance your home. The property that you are intending to buy is mortgaged to the bank or financial institution from which you have borrowed the loan, as a security until the whole amount of the loan is paid together with the interest. This is generally for self-occupied property.
What does a first housing loan mean?
Home loan taken on your self-occupied property is what I meant first housing loan. The repayment of the loan amount or interest paid there off is eligible for income tax rebate for this self occupied property. The amount paid as repayment of the principal amount of home loan is allowed as deduction under the section 80C of the Income tax Act subject to the maximum limit of Rs 150,000. This tax benefit can be availed only once the construction of the house is completed. No deduction is allowed under the construction period under this section.
For the repayment of interest on the home loan, deduction is allowed under the section 24 of the income tax act. The maximum deduction for this is Rs. 200,000 per annum. There are various ways where you can reduce interest on your home loan.
What do the second home loan tax benefits mean?
Many people also buy a second home for different reasons. It could be for an investment, as a holiday home, or to get a regular income source via rentals. But, before opting for second home, one should keep in mind the tax implications under the income tax act 1961 of the second home. 2nd home loan tax benefit depends on a few factors.
1) If you have taken a home loan for the second house, you are eligible to claim a deduction for the interest you have paid. Under the section 24, you can claim all the interest that has been paid as the interest towards the loan amount. There is no maximum limit for the exemption on interest paid on the second home loan. However, there is no exemption that can be availed under Sec. 80C for it as it is not a self occupied property. E.g. if you have taken second home loan and it has Rs 2.5 Lakhs as interest and Rs 1 Lakh as principal amount, you can claim this Rs 2.5 Lakhs as an income tax benefit.
2) If the second home is let out to a tenant, the actual rent received is treated as the taxable income under the head ‘income from house property.’ E.g. if you are getting Rs 1.5 Lakhs as rent, you need to show this income under income from house property.
3) If the second house is yet to be constructed, but you have taken the loan from the financial institution, 20% of the total interest that you have paid in the pre-construction period is allowed as the tax deduction. However, you can claim this deduction only for five years. After that, this deduction is exhausted and you cannot claim anything. E.g. if a second home loan tax benefit under construction and pre-construction interest is coming to say RS 5 Lakhs, you can claim Rs 1 Lakh per year for 5 years. You cannot claim pre-interest after 5 years.
How to avail second home loan tax benefits in India?
If an individual owns two houses in his name, one is treated as self-occupied and the other is treated as let-out, irrespective of the fact that it has been let-out or not. The income tax benefit is limited to the claim of the repayment of interest towards the second home loan. The repayment towards the principal amount cannot be claimed. The income earned or deemed to be earned as rent has to be shown under the head ‘income from house property’. You can claim the following deductions from this head apart from the interest paid on the loan:
- Municipality tax / Property tax – The municipality or property taxes paid during the financial year can be claimed as deduction. It is claimed on accrual basis not on payment basis.
- Repair and maintenance allowance – After the deduction of property tax for the fair rental value of the property, a flat 30% deduction is allowed in the name of repairs and maintenance. It is a fixed rebate that an individual can claim irrespective of the expenditures one has actually incurred.
Also Read: How working couples can maximum income tax?
Should you avail second home loan to get tax benefits?
We cannot say that it is always helpful for the individual from the taxation point of view to buy a second home. There are certain circumstances in which you do not get the benefit.
- If you have paid your home loan completely and there is no interest that is due on the second loan. In this case, you cannot claim the benefit and the rental value after the deduction of municipal taxes and standard deduction is added to your total income.
- Secondly, when the interest paid together with the standard deduction is less than the net annual value of the home, you do not get any benefit.
- One more point to be considered is that the second home is considered as your wealth, and wealth tax @ 1% of the value is levied on the assessed if the net wealth exceeds Rs 30 lakh.
- If your second house is under construction, you cannot claim any tax benefit as it has been mentioned earlier that the benefit under sec.24 can be availed only when the construction of the house is complete and you have received the completion or possession certificate. However, the total interest paid during the construction period can be claimed in five equal installments for consecutive five years, i.e. 20% every year.
Conclusion: When you take a second housing loan keep these points in your mind. If you are in a high tax bracket, taking a second housing loan is always beneficial to save income tax. You can claim unlimited interest as an income tax benefit. However, any rental income needs to be shown as income. One has to pay wealth tax too. Consider these tax implications before taking a second housing loan. I feel, this could be one of the best ways to save tax provided you consider all pros and cons.
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How to claim Income Tax Benefits on Second Home Loan