ENBuying a second home on a loan can give you tax benefits. Knowing how to leverage these benefits under the Income Tax Act can significantly reduce your financial burden. In this read, we’ll explore the key tax provisions related to second home loans to help you optimise your savings and make well-informed decisions.
Key Takeaways
- For a rented second home, you can claim an unlimited interest deduction under Section 24(b); for self-occupied, the total cap is ₹2 lakh across all properties.
- Under the new tax regime, you cannot claim deductions for either interest or principal on second home loans.
- If the second home is rented, rental income is taxable, but you get a 30% standard deduction and a full interest deduction on the loan.
- You can claim principal repayment deduction up to ₹1.5 lakh under Section 80C, only if you're under the old regime.
What are Interest Deductions on Second Home Loans?
If you opt for the new tax regime and have taken a home loan for a second property with an objective for self-occupation, you will not be eligible for interest deductions under Section 24(b), nor principal repayment deductions under Section 80C.
However, if you have purchased the property for an investment to rent out, you can claim interest deduction under Section 24(b) without any cap, though principal repayment deductions under Section 80C won’t apply.
Understanding Tax Benefits on Your Second Home Loan
When applying for a home loan on a second property, it’s important to know how tax benefits vary depending on whether the property is rented or self-occupied.
- Principal Repayment (Section 80C):You can claim deductions up to ₹1.5 lakh on the principal repayment, like your first home loan.
- Interest Payment (Section 24(b)): The interest deduction depends on whether the property is rented or self-occupied.
Tax Implications Based on Property Usage
If One Property is Rented
Rental income is taxable, but you can claim a standard deduction of 30% on the Net Annual Value (NAV) and fully deduct the interest paid on the home loan for the rented property.
If Both Properties Are Self-Occupied
You can claim an interest deduction up to ₹2 lakh total on home loans for both properties combined.
If Both Properties Are Rented
There is no upper limit on the interest deduction for home loans on both properties.
Note: Always remember that any principal or interest claimed as a deduction during tax filing cannot be included in the cost of the property while calculating capital gains at the time of selling the property.
How to Calculate Tax Benefits on Your Second Home Loan?
- Principal Repayment:Deduction limit of ₹1.5 lakh under Section 80C remains consistent across both homes.
- Interest Deduction
- No limit for let-out properties
- Maximum ₹2 lakh for self-occupied properties (combined for all properties)
Example: If your existing home loan interest is ₹75,000 annually, and your new home loan interest is ₹1,00,000, you can claim up to ₹1,25,000 interest deduction for the year.
Summary Table for Home Loan Tax Benefits
| Regime | Old Regime | New Regime |
| Property | Self-Occupied | Let Out |
| Interest | Up to ₹2 lakh | Actual Interest Paid |
| Principal | Up to ₹1.5 lakh | No Deduction Allowed |
How to Claim Tax Benefits on Your Second Home Loan?
- Ensure you are the owner or co-owner of both properties.
- Calculate your expected tax benefits in advance.
- Submit the home loan sanction letter to your employer.
- Provide the home loan interest certificate to your employer to adjust your TDS accordingly.
Note: If you do not submit the interest certificate, your employer will deduct TDS without accounting for this deduction, but you can claim the refund when filing your income tax return.
Conclusion
Purchasing a second home can be a rewarding investment or a comfortable living arrangement, but it’s essential to understand how the tax laws apply to maximise your benefits. Knowing the distinctions between self-occupied and rented properties, along with the related deductions, helps you plan your finances more efficiently.