Tax Benefits on Second Home Loan

Introduction:

Home loans are funds sanctioned by banks to individuals or entities to purchase or renovate a residential property. Factors contributing to deciding one’s eligibility for a home loan include monthly income, existing monthly obligations, age at the time of application of home loan, and retirement age. While income tax benefits on equated monthly payments (EMIs) is common knowledge, tax benefits on a second home loan while the first one is still pending may not be so. Reasons include second-time affordability and the rationale of buying another house on loan. Let’s bust some of the myths of a second home loan and see how it can instead be a strategic move in further enhancing deductions in your income tax.  

What are the types of house property, and how are they taxed?

To understand how a house property is taxed, you need to know its two components – Self Occupied Property (SOP) and Let Out Property. If you use your house property for your residence, it is an SOP; while if you rent it out or keep it idle, it is considered a Let Out Property or ‘deemed to be let out and taxed accordingly.

• Taxations on SOP and Let Out Property:

  If house property is occupied as your residence, its annual value is computed as nil. That means it is non-taxable. But your other house property, which you got on a second home loan, is subject to tax. If this second property is on rent, then the rental income is taxable. If this second property is deemed to be rented/let out, a notional rent – an assumed amount, not an actual amount, to have earned as rent – is calculated.

• SOP and Let Out Property under the new tax regime:

  Before 2019, an individual taxpayer could only claim one house as self-occupied and declare any other property as ‘deemed to be let out and hence pay taxes on those. But under the new tax regime, the Finance Act 2019 allows taxpayers to possess up to 2 house properties as self-occupied.

Additional read: What is the difference between a second home loan and a home loan top-up?

Tax Benefits of a second home loan

Why would you consider buying a second home on loan on top of an existing one? Let’s access the actual tax benefits:  

• Adjustments against rental income:

  The income tax laws allow you to claim deductions on the interest paid against the second home loan. In any given assessment year, this helps an individual taxpayer mitigate their tax burden generated from the rental income from the second house by adjusting against the loan interest. That is even truer when the rental income generated from the second home is less than the interest paid towards that second home. Further, the excess interest paid after adjustment with the rental income from the second house can be carried forward for the next eight consecutive assessment years. It can be adjusted against income from house property only.

• Benefits in case of joint second home loan:

  A friend, family member, or a spouse can be the co-borrower of the loan and a co-owner of the property. Each borrower cum owner can claim tax benefits on the interest paid towards loan repayment and the rental income. Your EMIs get split, and the tax benefits on the interests paid to get doubled. 

• No interest cap:

  Unlike the first home loan where a single or a joint borrower can claim deductions on interest up to 2 lakh and up to 1.5 lakh on the principal amount, in the second home loan, the borrower can claim deductions on the interest only. But this is not so much of a disadvantage as there is no interest cap, and the borrower can claim the entire interest amount paid as deductions.

Additional read: Why do women, as co-owners or as individual owners, receive extra tax benefits from home loans?

Conclusion

While obtaining a second home loan alongside the first one may look counter-intuitive at first, a second home loan can instead be a strategic move while claiming deductions in income tax. The new tax laws encourage individuals to buy more house properties on loans while providing allowances to borrowers to save taxes. More house properties also help with a tenancy of citizens who cannot yet afford their own house.