How to Claim Income Tax Benefit on Second Home Loan?

Whether you are changing city and are planning to buy a second home in the new city through a loan? Then you should not miss this article while planning to borrow a home loan for your second home, where you will 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 of 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.

Interest Deduction on Home Loan under New Regime

If you are opting for a new tax regime and also getting a second home loan where you are purchasing it to keep it for self-occupation, then no benefit will be available to you under Section 24(b) for interest deduction or for principal repayment u/s 80C. 

However, no restriction for interest deduction u/s 24(b) will be applicable in case you are purchasing a property as an investment for letting it out. But deduction under section 80C is not available. 

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. Whereas under Section 24(b) you can claim the interest expenses on your home loan as a deduction. 

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 standard deduction of 30% on Net Annual Value(NAV) and you can claim interest paid on a home loan without any limit. 

• When both the houses are not rented

You may not rent either of your properties, in that case both properties as 'self-occupied'. You can claim interest incurred on a home loan only up to 2 lakhs for both the houses combined. 

• When both the houses are on rent

If both the houses are on rent then you can claim interest on home loans of both the houses without any limit.

Important Note:

If the interest or principal claimed as deduction while filing the income tax return, the cost of the property shall not include such cost while calculating the capital gain on sale of the said property.

How to Calculate Tax Benefit on Second Home Loan?

Deductions on Principal

• 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. 

Deductions on Interest

• The tax benefit for interest expenses depends on whether your property is rented or self-owned. 
• In the case of a let-out property, there is no limit on the deduction of interest expenses.
• For self-occupied properties, the limit is Rs. 2,00,000 on total interest paid, not per house. 

For example, you already have a home loan of which interest of Rs.75,000 is paid per annum. If you are taking home loan for another home, interest deduction only up to Rs.1,25,000 can be claimed. 

A summary table explaining the provisions related to deductions on home loan is provided below. All the deductions given should be calculated for all the houses totally, not for each houses.

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. Enter the details of your deductions under Section 80C. 
8. Click on the ‘Calculate’ button to receive the correct output. 

Procedure to Claim Tax Benefits on Second Home Loan 

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. Provide your home loan sanction letter to the employer.
4. Submit the home loan interest certificate. It will help your employer in adjusting the TDS calculation. 
5. If you fail to submit this certificate, your employer will keep deducting TDS from your salary without considering this deduction. 
6. In that case you can claim the deduction while filing the tax return and you will get the refund of the excess TDS deducted by your employer.

Example of Tax Benefit on Second Home Loan

Let’s assume Mr Prakash already owns a home 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 through a new home loan and rent out the existing one.

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. 

Interest deductible on accrual basis:

It is not material whether the interest is paid during the year. Therefore, interest is deductible even if the interest is not paid as long as it is accrued during the year. However, interest on unpaid interest is not deductible.

Interest deductible in other cases:

When there is an agreement between the seller and the buyer to settle the agreed price in instalments, the unpaid amount may be treated as the loan borrowed and the interest payable on such amount would be deductible under Section 24(b).

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. The quantum and availability of tax benefits depend on numerous factors such as the tax regime opted, self-occupied property vis-a-vis the let-out property, the amount of interest and principal portion, pending loan on the first house etc.