How to Claim Income Tax Benefit on Second Home Loan?

While planning to borrow a home loan for your second time, you should get a clear idea of the tax benefits of a second home loan. According to Section 80C and Section 24 of the Income Tax Act, you can avail tax benefits on home loan repayments. However, if you are planning to rent one of the properties, there can be some differences in tax benefit rules. 

Read on for a detailed overview of the tax deduction rules on a second home loan.

Tax benefit on a second home loan

If you are applying for a home loan to purchase a new home, you must know the ways to avail tax benefits on the second home loan. Under Section 80C of the Income Tax Act, borrowers can avail tax deductions on the principal amount. However, this is not applicable for a second home loan, but you are eligible for tax benefits on your home loan interest rates. 

Taxation rules for a second home loan depend on the purpose of your purchase. So, here's how you can claim tax benefits as per the usage of your second home:

• When one of your houses is on rent

The income you generate by renting your house is taxable according to the Income Tax Act. However, you can claim a deduction for the amount spent on maintenance or repair of your home. Besides, you can claim tax deductions on the payable interest amount and it is not capped as per your property’s construction status.

• When both the houses are not rented

You may not rent either of our properties but the government does not consider two properties as 'self-occupied'. You can claim one house as 'self-occupied property' and the other as 'deemed rented out'. In this case, you need to pay tax on the assumed rent amount for that particular property you prefer to categorise as rented out. 

The location of your house plays a major role in deciding rent amount as well as payable tax. Moreover, you can claim a deduction on the premium amount under Section 80C of the Income Tax Act by insuring your second home. 

• When both the houses are on rent

If you are staying with your parents or shifting abroad, you can rent out both of your properties and double your income. In such a scenario, you need to pay tax on the income generated from renting out both properties. However, you can avail the tax benefit on 2nd home loan interest rates under Section 24 of the Income Tax Act.

How to calculate a second home loan tax benefit?

Under Section 80C of the Income Tax Act, a maximum of Rs 1.5 lakh deduction is applicable on your principal repayment amount. This deduction amount remains the same in the case of a second home. However, the tax benefit also depends on whether your property is rented or self-owned. 

Previously, home buyers were eligible to receive a deduction on the entire interest amount for deemed rented or actually rented houses. However, the Income Tax authority has imposed a limit of Rs 2 lakh now. 

The calculation procedure for a second home loan tax benefit depends on various factors. So, you can use online tax calculators to avoid the risks of miscalculations. Here are the steps to follow for the calculation procedure:

1. Log in to a reliable home loan tax benefit calculator page online
2. Enter the financial year for which your home loan tax will be assessed. 
3. Select your category as male, female, senior citizens, etc.
4. Enter your earnings per annum in the proper field. 
5. Enter the principal amount you have already repaid for that financial year. 
6. Fill in the interest amount which you have paid for that year. 
7. Click on the ‘Calculate’ button to receive the correct output. 

Procedure to claim second home loan tax benefits

If you are confused about how to get tax benefits on the second home loan, here are the steps to follow for the same:

1. Firstly, you must be the owner or co-owner of both the first and second homes.
2. Calculate the tax benefit amount on your second home loan beforehand.
3. Submit the home loan interest certificate. It will help your employer in adjusting the TDS calculation. If you fail to submit this certificate, you cannot avail any deduction benefit as the employer will keep on deducting TDS from your salary.
4. Provide your home loan sanction letter.

Note: If you fail to submit the home loan interest certificate, you cannot file income tax returns to avail tax benefits on a second home loan.

Example of tax benefit on second home loan

Let’s assume Mr Prakash is a homeowner in Kolkata and he is repaying the home loan borrowed for that property. However, he needs to relocate to Chennai for employment purposes. So, Mr Prakash decides to buy a new home in Chennai and rent out the existing one to finance the home loan.  

Now the question arises if he is eligible for a second home loan, will he get tax benefits on the second home loan? 

Yes, Mr Prakash can avail a second home loan and claim tax benefits as per Section 80C and 24 of the Income Tax Act.

Final Word

Thus, you can invest in a second home and enjoy tax benefits according to the Income Tax Act. However, you need to ensure the ownership of both properties and use the property accordingly to claim tax benefits on the second home loan. If you have availed home loan for your self-occupied property, you may even claim a full deduction on the principal loan amount under certain conditions. However, for rented property, the rental income is considered taxable.