Home Loan Tax Benefit on Second Home

Owning a second home can be a rewarding experience. However, you should be clear about the purpose of investing in the house, its location, and the property according to your needs. There are no restrictions on the number of homes that one can buy. You can claim the necessary tax benefits on multiple home loans. However, it all depends on your ability to pay back the loan of the properties taken together.

The main purpose of buying a second home is to spend time away from your regular routine or to use the property as an additional long term investment or to rent it out. Getting a second home may be a strategic decision since that can get you home loan tax benefits. Your earnings will also determine the amount of home loan that you are eligible for. You can avail of home loan tax benefits on the second home by claiming it as self-occupied. The notional rent on the second home will be added to your income and will be taxed according to the applicable tax slab.

Here are the home loan tax benefits, explained when buying a second home:

  1. Taxation of a Second Home

There are two components of a house property that you need to know in order to understand its taxability: Self-Occupied Property (SOP) and Let out Property. A residential property that is used for residing is known as self-occupied property (SOP), while the other is considered as a rented property.

The annual value of a house, which you treat as self-occupied, is determined to be nil. Therefore, there is no tax on the self-occupied property. But you’re rental income is subject to tax. This means the actual rent received on your rental home is taxable under the head ‘income from house property’. Even if the house is not on rent, it is supposed to be let out. In such cases, a theoretical rent value is considered as the gross taxable rent for such property and the tax is calculated.

Moreover, if you happen to rent out both your homes and live in a third property, the rental income of both the properties comes under the purview of tax.

  1. Tax benefits on a Home Loan when buying a second home

When buying a second home with the help of a Home Loan, you can avail tax deductions on it. Deductions under Section 80C, the principal amount of the loan may not be available when buying a second house, you can enjoy home loan tax benefits on second home on the interest component.

Earlier, in the case of rented or to be rented house, the interest was fully deductible. In other words, if the interest payable on the loan for the second house was larger than the rent received, the remaining can be adjusted against your other income. A limit of Rs. 2 lakh has been imposed on such adjustment. The remaining portion of the interest can be carried forward for 8 successive years to be adjusted against the income from house property. In the case of a self-occupied property, any additional income remaining after the deduction of Rs. 2 lakh can neither be carried forward nor adjusted against other income.

You could buy a second home as a vacation home or as an investment. When treated as self-occupied the tax benefits on home loans doesn’t attract taxability. On the other hand, when it is not maintained as your residence, you would need to evaluate the rental income from the property to calculate its taxability. Thus, before you plan on purchasing a second home, along with exploring options for its looks and design, also look into all the taxable aspects.