How to Claim Tax Benefits on Second Home Loan

Real estate was considered to be one of the best long-term investments, according to a 2016 Gallup Poll. Due to the Covid-19, the sector witnessed a major downfall and slowdown in its growth. However, according to recent studies, the real estate market is expected to grow by 5% capital value growth in 2022. A reversal may be expected.

As profitable and exciting purchasing real estate seems, it is also difficult to finance the same. It is a fact that real estate is costly. To help the general public, the provision of housing loans came into being. To simplify the types of house properties let us understand the same in detail.

House property and all you need to know

As per the Income Tax Act, of 1961 there are typically 3 types of house properties –

• Self-occupied Property (SOP) - A self-occupied property is occupied by the owner for residence purposes. The owner does not need to pay any tax on self-occupied houses.
• Let-out Property (LOP) - When the owner lets out a property to a tenant for residential or commercial purposes, it is considered to be let-out property. The rent earned from LOP is taxed.
• Deemed let-out Property (DLOP) - As per tax regulations, a person cannot have more than 1 residential property. If a person owns more than 1 house property, only one is considered to be an SOP, the other is considered to be a deemed let-out property. The tax applies to DLOP as per a notional rent value that is calculated.

Buying a house has been a dream for so many people. The Government of India tries to support citizens by allowing tax benefits on housing loans. The benefit of tax deductions is not limited to one housing loan. Now you can enjoy the tax benefit on a second housing loan too.

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Second Home Loan tax deductions:

According to the Income Tax Act, of 1961 you can save taxes on your 2nd mortgage under these 2 sections/ clauses -

• Section 80C- Under section 80C, you are allowed to claim deductions on the principal amount paid by you, up to INR 1.5 lakhs. The deduction is applicable on the house purchased for self-occupancy or one that is let out.
• Clause 24(b)- Under this clause, you can claim interest payment deductions. The maximum deduction that can be availed is up to INR 2 lakhs. If you rent out the property, the entire home loan interest is allowed as a deduction. 

Second Home Situations:

Self-occupying the second home: If you have 2 properties, either one of them is considered to be self-occupied. Whether or not a tax-payer rents the other house, it will be considered as ‘deemed to be let out’, and taxed accordingly.

• Renting out the second home: If the 2nd property is considered to be let out, the owner needs to declare the rent. The owner will be able to deduct 30% of the rent, interest payments on a home loan along with municipal taxes paid during the year. The upper limit is again up to INR 2 lakhs only.
• Self-occupying both the residencies: If you rent out both your houses and reside in a 3rd property, the total rent from both the houses will be taken into account. However, the amount paid towards the interest on the home loan for both these properties will be eligible for interest deductions under Section 24 of the Income Tax Act.

Tax Benefits on Second Home Loan:

There are a set of tax benefits that can be enjoyed by owners who own 2 houses. You can make use of these benefits only if you have not settled the first home loan entirely. The advantages offered are –

Rent or Speculative Rent- 
If you have 2 properties owned. One of them is considered to be self-occupied and used for residence purposes. In case you wish to rent or lease out the property to a tenant then the income earned from the same is taxable. The rent earned is considered to be the annual value of the house. If you do not rent the second property, it is considered to be deemed let out, and a notional or speculative value is considered to be the rent. You can deduct 30% of the rent as maintenance and upkeep for reimbursement.

Municipal Tax Deduction- 
The municipal tax deduction is allowed as a deduction only if it is paid in the particular fiscal year. If past taxes are paid in the current year, it will be allowed as a deduction.

Interest benefits-
If the second property is let out or deemed let out, you can enjoy tax benefits on interest rates of up to INR 2 lakhs.

Conclusion:

As per the new rules, from FY2019-20, an Indian citizen can enjoy the benefit of claiming 2 houses to be considered self-occupied properties. The remaining houses are considered to be let out or deemed let out properties. If you are considering having another residence in your city, buying a holiday home or just planning for a second source of income via renting, consider taking home loans from SMFG Grihashakti to help you fulfil your dream of buying your second abode.