Step-by-Step Process to Claim Tax Benefits on Second Home Loan

tax benefit on second home loan

Investing in a second property is not just a matter of finding the perfect location or choosing the right amenities; it's also about understanding the financial implications, particularly the tax advantages of such an investment. The tax benefit on a second home loan, governed by the Income Tax Act under Sections 80C and 24, can significantly impact your financial planning. Whether your second home is a rental property or a personal retreat affects these benefits, adding layers of complexity to the decision.

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A second home loan can be a complex and intimidating process. However, armed with the correct information and guidance, this journey can lead to lucrative financial outcomes, transforming a second home from a mere asset into a wise investment strategy. This blog is designed to illuminate the pathway to understanding and maximizing the tax benefits of a second home loan, thereby enabling homeowners to make well-informed and financially beneficial decisions.

Understanding the Basics of Tax Benefits on Second Home Loan: Scenarios

Case of Two Self-Occupied Properties: Post the Interim Budget 2019, you can claim both homes as self-occupied. The total home loan interest deduction on both properties must be within ₹2 lakh. Owning a vacation or retirement retreat is a dream for many. The tax benefit on second home loan can make this dream more attainable. When your second home is not rented out, it's presumed to be self-occupied, allowing certain deductions. The second home loan tax benefit calculator can be a useful tool to estimate your savings in this scenario.

One Home Self-Occupied, Another on Rent: Renting out your second property can be a lucrative source of income. However, it's crucial to understand the tax benefit of a second home loan in this context. The rent received is taxable, but the interest on the home loan is deductible, offering a substantial financial advantage. If the second home is rented out, declare its rental income. You can deduct a 30% standard deduction plus municipal taxes from this income and claim up to ₹2 lakh against other income sources.

Suggested read: Home Loan Tax Benefits

Examining the Tax Implications of Vacant Property: A Hidden Opportunity

If your second home is lying vacant, the tax rules differ slightly. The property is deemed to be let out, and the notional rent is taxed. However, the interest on the home loan is still deductible, providing an indirect income tax benefit on 2nd home loan. This rule is beneficial for those who own multiple properties, as it allows them to deduct the interest for all of them. Additionally, any rental income from the property can also be deducted from your taxes.

Municipal Tax Deduction: A Lesser-Known Advantage

One often overlooked aspect is the deduction available on municipal taxes paid. This is applicable when the property is in your possession and can lead to additional savings on your taxable income.

Suggested read: Pre-EMI Tax Benefits

Tax Deduction Provisions

Section 80C - Principal Repayment: You can claim a deduction of up to ₹1.5 lakh on the principal repayment under Section 80C. This limit is cumulative for both the first and second home loans. Furthermore, it's important to note that the ₹1.5 lakh limit under Section 80C encompasses various other investment avenues as well, such as the Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), and life insurance premiums. This deduction can be claimed for more than one property, and it applies to both self-occupied and rented properties. Therefore, the maximum combined tax benefit for principal repayment on both first and second home loans under Section 80C remains ₹1.5 lakh.

Section 24(b) - Tax benefits related to the interest payment on home loans, including those for second home loan requirements, are governed by Section 24 of the Income Tax Act. Post the 2019 Budget amendment, the regulation is such that individuals holding home loans on two properties are subject to a maximum tax benefit cap of ₹2 lacs for interest payments. This limit is applicable irrespective of the rental status of the second property, which is still regarded as a Self-Occupied Property for taxation purposes.

Properties Let Out or Deemed to be Let Out -  For such properties, there's no upper limit on the interest deduction. You can claim the entire interest paid as a deduction under the head 'Income from House Property.' This means that you do not have to consider the rental income from the property when calculating the interest deduction.

Under Construction Properties - Special provisions apply under the 'Income from House Property' section for tax benefits on an under-construction second home. The special provisions allow you to claim the interest paid on the loan taken to purchase the under-construction property as a deduction. 
Additionally, you can claim the interest paid on the loan taken for construction expenses as a deduction.

Suggested read: Home Renovation Loan Tax Benefits

Detailed Steps for Claiming Tax Benefits

To claim tax benefits on a second home loan in India, follow these steps:
1. Ownership Verification: Ensure you are the owner or co-owner of both the first and second homes. This is a prerequisite for claiming tax benefits on any home loan.
2. Calculate Tax Benefits: Before proceeding, calculate the potential tax benefit amount on your second home loan. This involves understanding how much of the principal and interest is eligible for deduction under sections 80C and 24(b) of the Income Tax Act.
3. Obtain a Home Loan Interest Certificate: Get a home loan interest certificate from your lender. This document is essential as it details the amount of interest you have paid during the financial year.
 4. Submission to Employer: Submit this certificate to your employer. This step is crucial for the correct adjustment of Tax Deducted at Source (TDS) on your salary. Without this certificate, your employer might continue to deduct TDS without accounting for the potential tax benefit you’re eligible for.
5. Provide Home Loan Sanction Letter: Along with the interest certificate, you may also need to submit your home loan sanction letter. This letter serves as proof of the loan amount, terms, and conditions agreed upon by you and the lender.
6. File Income Tax Returns: When filing your income tax returns, include the details of your home loan and the tax deductions you are claiming. Make sure to keep all relevant documents handy in case of any scrutiny from the Income Tax Department.
7. Consult a Tax Advisor: If you find the process complex, consider consulting a tax advisor. They can provide personalized advice and ensure you maximize your tax benefits while remaining compliant with tax laws.
8. Regular Updates on Tax Laws: Keep yourself updated on any changes in tax laws related to home loans. Tax benefits, limits, and conditions can vary with annual budgets and policy updates.
By following these steps diligently, you can effectively claim the tax benefits on your second home loan, potentially leading to substantial savings on your tax liabilities. Remember, the key is to be organized, well-informed, and proactive in managing your home loan and related tax benefits.

FAQs About Claim Tax Benefits on Second Home Loan

Yes, a second home loan is eligible for tax exemption in India. You can claim tax benefits on both the principal and interest payments. Under Section 80C, you can claim deductions on the principal repayment up to ₹1.5 lakh annually. For the interest component, Section 24(b) allows deductions up to ₹2 lakh, even if the second property is considered self-occupied following the 2019 Budget amendments.

For a home loan, the annual tax exemptions you can avail of are: Up to ₹1.5 lakh for principal repayment under Section 80C and up to ₹2 lakh for interest payment under Section 24(b). This is the combined limit for all self-occupied properties you own.

For an under-construction second home, the tax benefit on the interest paid during the construction phase can be claimed in five equal installments starting from the year the construction is completed. This is in addition to the regular annual interest deduction you can claim under Section 24.

To claim interest on a second home loan, obtain a home loan interest certificate from your lender and submit it to your employer for TDS adjustment. Include this information in your income tax returns to claim the deduction under Section 24(b).

Yes, you can get another home loan even if you already have one, subject to your eligibility and creditworthiness. Lenders will assess your income, existing loan obligations, credit score, and other factors to determine your eligibility for an additional loan.

Section 24 of the Income Tax Act pertains to the deduction on interest payments of home loans. For a second home loan, this section allows you to claim deductions on the interest portion of your EMI up to ₹2 lakh per annum. This limit applies whether the second home is rented out or considered self-occupied after the 2019 Budget.

Published on 29th December 2023