Second Home Loan- Tax Implication and Benefits

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( — July 26, 2019) — You may own multiple properties and may avail of Home Loans for most of these. There are no restrictions on the count of house properties and Home Loans you are entitled to. However, it is important to note that the total amount of Home Loan would be sanctioned considering certain factors, such as your age, income, credit score, job stability, residence area, co-applicants (if any) and more. All these factors collectively reflect upon your creditworthiness and loan repayment capacity.

Individuals take home Loans for purchasing residential properties, construction of houses, home renovations, and extensions. Home Loan sought for any of these purposes for one or more properties needs to be repaid according to a fixed repayment schedule. This repayment would constitute of both the principle as well the interest components. Both these elements have their tax implications for the first Home Loan as well as Home Loans taken thereafter.

While it is quite straightforward to understand the tax implications on principle and interest paid out for a single Home Loan; it may get baffling to understand tax benefits on two or more accounts. Let’s find out how you can avail maximum Tax Benefits on your Home Loan for a second property.  

Tax Benefits on Principle Payment

According to Section 80C of the Income Tax Act, 1961, you can avail tax exemption up to Rs. 1.5 Lakh on repayment of the principal amount of your Home Loan. The principle could be with regard to one or multiple properties, but the tax deduction is restricted to the said amount only. Since the threshold of Rs. 1.5 Lakh has been designed to include other essential investments and expenses like PPF, PF, Life insurance policies, tuition fees, etc., the scope of enjoying tax benefit with regards to Home Loan Principle amount is very narrow.

Points to note for claiming tax benefits on principal repayment

One important criterion to know before filing an ITR is the authorisation of the lender. The repayment of principle with regard to loans taken from acquaintance does not entitle you to claim deduction under section 80C. For example- Principal payment for SBI Home Loan is entitled to a deduction, but principle repaid to friends and relatives are not eligible for deduction.

Next, deduction on the grounds of principle repayment of Home Loans can be claimed only on completion of construction of the house property. Also, you can claim deduction only for the house possessed for self-use.

In case there are any principal payments for which benefit has not been availed before possession, the amount in question would be eligible for deduction in five equated portions to be claimed over the next five years of possession.

The deduction is also available for any amount that is paid for registration and stamp duty purpose. All these expenses are considered along with the amount of principal repaid.

Benefit of Second Loan for Co-Applicants

In case the property is owned by two people, both co-applicants would be entitled to a deduction of Rs. 1.5 Lakh under Section 80C. Even if the amount of principal re-payment is greater than the threshold, the aggregate deduction for both loaned out properties would be restricted to the said amount.

Tax benefits on interest payment

In case a person owns two properties and wants to hold both properties for self-use or family, he would have to treat one of those as self-occupied and the second property so held would be treated as let out for tax purposes.

That is to say, even if the property is not let out, it will be deemed to be let out and earn rent equivalent to such other properties. This is referred to as notional rent. The notional value of the second property may be calculated as Rental Income minus Municipality taxes paid for the said property minus 30% standard deduction.

Tax treatment of interest on Second Home Loan

If you include the said rent as “Income from house property” you would be able to claim a deduction for the entire amount of interest paid on Home Loan for such property. It is also important to note in this context that there is no capping on the amount claimed as deduction as interest.

Set off provisions– If the amount of interest paid for the property deemed to be let out was higher than the notional rent, the resultant loss under the head “House property” could be set off against income from other income heads. This is extremely beneficial for you if you hold two properties and are running Home Loans, as the interest component on the second Home Loan may help in setting off profits generated under other income heads as well.

Co-applicants Co-applicants may seek benefits of deduction of grounds of interest re-payment.

Provisions of Interim budget 2019-As per provisions of Interim Budget 2019 in case you own two house properties, both may be considered as self-occupied, and the requirement of paying notional rent on any one of them has been eliminated. This has been formulated to eradicate the effect of notional rent income for you if you own the second home in your home town or the second home is used for your parent’s residence.

Both the houses may be treated as self-occupied; however, a capping of Rs 2 Lakh would be applicable to the amount claimed as a deduction on the ground of interest on Home Loan. That is, even if the cumulative amount of interest paid on both the loan exceeds a sum of 2 Lakh, the deduction would be restricted to an amount of Rs. 2 Lakh only. The capping is extended at Rs. 3 Lakh for Home Loans taken by senior citizens.

Set off provisions for second Home Loan interestIt is further to be noted that there is a further capping of 2 Lakh for the setting of any loss under the head “Income from house property” in one year. That is to say if a loss of greater than Rs. 2 Lakh arises under the head “Income from house property,” any amount in excess of Rs. 2 Lakh can be carried forward to set off in the next eight consecutive years. Further, such losses can be set off against income from house property only and no other income head. This would prove to be more beneficial to you, if you hold two house properties without Home Loan.

Co-applicants This would prove to be beneficial as both the co-applicants can reap benefits of deduction of Rs. 2 Lakh each. Any additional interest paid because of loan on the second house property will be beneficial in such a scenario.

What components lie within the fold of interest amount?

It is also important to note that the interest paid, processing fees incurred and pre-payment charges if any, will all be included for computation for a deduction.