Most people purchase a second home as an investment and rent it out in order to avail long term capital benefits. Buying a second home has its share of benefits in terms of tax payments, depending on how you plan to use this property, there are a few things that you need to do in order to claim them. Your property can either be classified as self-occupied or as let-out, even if you haven’t rented out the property you don’t reside in.

Home Loan for Second Home

Availing a Home Loan for your second home makes you eligible for tax deductions under Section 80C. Home Loans are usually cheaper than all other types of loans and you can avail full tax benefit on the interest paid. So, it’s always beneficial to opt for a Home Loan to buy your second house or apartment.

Co-ownership is another great way to own a second property, as tax benefits can be availed separately. You and your partner (the co-owner) are eligible for tax deductions when you use your own funds (separately) to repay the loan. It works out best when the loan is in equal proportion. You can use the second Home Loan tax benefit calculator to know exactly how much deduction you’re eligible for.

Tax Benefits

The tax treatment for your second home will be different from the first and you need to know that to understand what your Home Loan tax benefit for second home is.

  • In case, you are availing a Home Loan for a self occupied property, you can claim deduction under Section 80C for the principal amount of the loan up to Rs.1 lakh. In case of the interest component, tax exemption up to Rs.2 lakh is permitted.
  • In case of a second home, you can’t claim deduction on the principal amount but you can do so on the interest component. The best part is that there is no upper limit on this value.

Housing loan tax benefit-under construction property is slightly different—20% of the interest you pay during the pre-construction period is eligible for tax exemption. Under construction homes fall under this category too. However, the benefit of this second house tax benefit is available only during the initial five years.

There is another second Home Loan tax benefit that you can get. You can claim housing rent allowance (HRA) and housing loan deductions in case your second home and your occupied residence are in different cities. However, you can claim HRA even when both your homes are in the same city, provided you can furnish a concrete reason for not occupying the second property or letting it out for rent. For example, if you have your family living far from the city, maybe in the suburbs, you may face a lot of difficulty in commuting to your workplace everyday. If you’ve purchased another home nearby to reduce the stress of travel, you can claim an exemption citing that reason.

Rent from your property is considered as a source of income, and you can also claim tax deductions on that too. However, if the property is not let-out even for one day, notional annual rent is used for calculating your annual income. This equals the rent you would’ve received if the property was let-out.

Once that is calculated, the following deductions are made from the rental income –

  • Property tax
  • Ad-hoc allowance for maintenance and repairs. This allowance is 30% of the value you get by using this formula – [ Annual rent – Property taxes paid]
  • Interest paid on the loan taken for purchase/renovation. You can claim pre-construction interest in five equal instalments over 5 years from the date of completion.

For the first few years, the total value of deductions is usually much higher than the rental income. This allows you to offset the loss incurred against all other taxable incomes.

In conclusion, second Home Loan tax benefits India are many, provided you file your taxes properly, and on-time to claim the benefits while filing your tax returns.

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