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Tax Benefit on Second Home Loan

One of the prime benefits of opting for a home loan to purchase a house is the availability of income tax concessions. These concessions are available on the repayment of interest and the principal amount. Sec 24 of the IT Act deals with the interest component of the EMI. Similarly, IT concessions for repayment of the principal element of the home loan is available under Sec 80C of the IT Act.

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Section 24 of the IT Act

Section 24 deals with Deductions from income from house property.

The section states that the computation of income chargeable under the heading ?Income from House Property? shall be made after accounting for the following deductions.

  • An amount equal to 30% of the annual value with a maximum of 30,000
  • The interest payable on the loan taken for acquiring the property up to a maximum of 2 lakhs

The condition is that the total deduction under both the provisions shall not exceed 2 lakhs. Secondly, the concession on the interest payable is available only if the acquisition is within five years from the last day of the financial year in which you had availed the loan.

Also Read - Income Tax Documents Required for Home Loans

Section 80C of the IT Act (Concerning Home loan repayments)

Section 80C allows individuals to avail IT concessions on the repayment of the principal amount of home loan availed from a bank or HFC. The maximum deduction permissible in a financial year shall not exceed 1.50 lakhs (overall for all sub-sections of Sec 80C).

It implies that the overall deduction under Sec 80C is limited to 1.50 lakhs. The repayment of the home loan principal amount is one of the benefits allowed under Section 80C. The others include payment of Life Insurance premium, investment in Government securities such as NSC, and so on.

Also Read - House Rent Allowance v/s Home Loan: Which is Better Tax Saving Option?

Tax benefits for a second house

The IT Act classifies properties into two types, self-occupied, and rented. It does not distinguish between a commercial and residential property. The Act considers income from all properties under the head, 'Income from House Property.'

From the financial year 2019-20 onwards, the individual can show two houses as self-occupied. A property is considered self-occupied under the following circumstances.

  • The owner resides in it.
  • The property is vacant.

If the property has been rented out anytime during the year, the individual cannot claim it as self-occupied.

It is significant to note that the individual could show only one property as self-occupied before the financial year 2019-20. Therefore, additional benefits are available to the individuals if they have two properties acquired through two separate home loans.

Also Check - Home Loan Tax Benefits

Tax benefits in the case of self-occupied properties

  • In the case of a self-occupied property, the annual value is NIL. Hence, there is no standard deduction available on a self-occupied property.
  • The deduction on the interest repayment of the home loan is available up to 2 lakhs on the satisfaction of the following conditions.
  1. The borrower should have availed the loan after April 01, 1999.
  2. The acquisition of the house should be completed with five years of availing the loan.
  3. The borrower should produce the interest certificate from the lending institution.

If the above three conditions are unsatisfied, the maximum deduction allowed under Sec 24 is restricted to 30,000.

Also Read - 15 Lakh Home Loan EMI Interest Rate

Tax benefits in the case of rented out properties

Though the Income Tax Act allows individuals to consider two houses as self-occupied, it must either be vacant or self-occupied. If the individual lets out the property on rent. The above calculations do not apply. Under such circumstances, the following rules apply.

  • The standard deduction of 30% of the annual value is applicable. Hence, the individual can claim this deduction up to a maximum of 30,000.
  • Secondly, the individual has to declare the income received in the form of rent in the IT returns.
  • The individual can claim deductions on the entire interest and municipal taxes paid on the property under Sec 24. If there is a loss in the income from house property, the individual is allowed concessions up to 2 lakhs. Any loss over 2 lakhs can be carried forward up to the next eight assessment years.

The same rule applies if the individual has more than two properties.

Tip - Check Your Cibil score before applying for a home loan.

Tax benefits in the case of houses under construction

It is significant to note that the individual cannot claim any benefit under Sec 24 in respect of incomplete houses. If the development is not complete in a particular year, there is no benefit available for claiming during the year. However, the individual can claim the interest benefit after the completion of the construction.

This deduction of interest is allowed in five equal instalments starting from the year from which the construction is completed. For example, if the development of the property is completed on say July 31, 2018, the individual can claim one-fifth of the interest paid until March 2018 when filing the returns for the year 2018-19. Similarly, he/she can carry on for the next four years.

Also Check - Documents Required for Home Loan

Points to note

If the second house is self-occupied or vacant

Before 2019-20, there was no provision to treat a second house as self-occupied. It was deemed to be let out even if it was vacant. Therefore, the individual had to include a notional amount as rent that was taxable. However, they could claim tax concessions on the entire amount of interest, even if it was more than 2 lakhs. It also allowed the individual to carry forward the losses in house income for a period of eight assessment years.

From the year 2019-20, the individual has been allowed to treat two houses as self-occupied, even if one of them remained vacant. It will enable the individual to save on the income tax on the notional rent that he/she does not receive. At the same time, it also stipulated that the total concessions for repayment of interest remain restricted to a maximum amount of 2 lakhs. It did not allow the carrying forward of the losses for the next eight assessment years.

This exemption is not available for individuals with more than two houses.

Also Check - Home Loan Disbursement Process

If the second house is rented

If the individual rents out the second house, the income received as rent is taxable. Under such circumstances, the taxes paid to the municipal authorities can be set off against the rent. The rules of standard deduction of 30% of the net annual value apply. The individual can also claim the entire interest paid on the home loan for IT deduction subject to a cap of 2 lakhs in one financial year. He/she can carry forward the losses if any, to the next eight assessment years.

This example will help you understand the implications better. (After the amendments come into force w.e.f. FY 2019-20)

 Type of House PropertySelf-occupiedVacantLet out
AGross Annual Value (Rent paid - 7,000 X 12)NILNIL84,000
BLess Municipal TaxesNANA3,000
CNet Annual ValueNILNIL81,000
DLess Standard Deduction (30% of the NAV)NANA24,300
ELess Interest on Housing Loan2,00,0002,00,0002,00,000
FLess Pre-construction Interest (1/5 of 3 lakhs)60,00060,00060,000
GIncome from House Property (D + E + F - B)2,60,0002,60,0002,03,300
HOverall loss restricted to2,00,0002,00,0002,00,000
  • Note that the additional loss amount of 3,300 in the case of letting the house on rent is available for set off over the next eight assessment years. However, the individual has to pay income tax on the amount of 84,000 that he/she receives during the year.
  • Before FY 2019-20, the positions of the 'Vacant' and 'Let Out' cases were the same. Hence, the individual had to pay income tax on the notional amounts of rent that he/she had not received in the first place.
  • This concession is beneficial to people having two houses.

Also Check - Can I Avail Two Home Loans at the Same Time?

A point of contention

Though the IT Act has provided relief to individuals who own two houses, there are some points of contention.

  • The individual taxpayer's second house can still be considered to have been let out if it does not satisfy the conditions stipulated in Sec 23 of the IT Act.
  • Sec 23(2) states that the house can be considered self-occupied only under the following two circumstances.
  1. The owner treats it for residential purposes
  2. The owner has left it vacant because he/she is unable to occupy the same because of employment, business, or professional constraints (such as employed in a different city and living in a rented house there)
  • Thus, it entails that the benefits will be available only if any of the above two conditions are satisfied.
  • Therefore, if the conditions are not met, the property is considered as let out.

This example can help to explain things better.

Mr A has two houses in Mumbai. However, he is posted to Chennai on employment. He lives in a rented home with his family. Of the two houses in Mumbai, one is occupied by his parents, whereas the other house is vacant. Will he be eligible for the concession of treating both his houses as self-occupied?

As per the situation before 2019-20, he could not do so. He can treat only one house as self-occupied. From 2019-20, both the houses should qualify as self-occupied. However, there is a grey area because his parents occupy one of the houses. As he does not receive any rent for the same, there is no benefit accruing to him. Therefore, he can treat the home as self-occupied.

Also Check - Home Loan Interest Rates

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Tax Benefits on Second Home Loan FAQs

✅ Will the benefit be available to the homeowner if he resides and carries out business activities from the same house?

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Yes, the benefit of IT concessions is available if the owner resides and carries out business or profession from the same premises.

✅ If the individual borrower uses one house for residence and uses the other for his business or profession, will he get the benefits?

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It depends whether the borrower receives rent from the business or profession carried out in the second house. If no benefits are accruing to him from the second house, the IT Act allows it to be treated as self-occupied.

✅ How does the individual benefit from this provision that applies from the financial year 2019-20?

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Before the current financial year, the individual borrower could not consider two homes as self-occupied. He had to calculate the notional rent and account it as income if the house was left vacant or occupied by other members of his family. The amendment brings relief to such homeowners where they can leave the second house empty and still claim it as self-occupied.

✅ Can the individual claim IT benefit if there is no loan on the second house?

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If there is no loan on the house, there is no question or repaying interest and instalments. Therefore, the IT benefits under Section 24 and Section 80C do not have any relevance at all.

✅ How will the changes announced in the present budget affect such cases?

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The present budget announced a separate tax slab for individual assesses who forgo the concessions available under Sec 24 and Sec 80C. However, it still allows the taxpayers to continue in the existing structure if they wish to avail the benefits of the IT concessions. Therefore, the changes announced in the present budget should not affect such persons.

✅ Is the benefit restricted to only two houses or is it available for more than two?

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Today, the benefit is available for an individual owning two houses. Secondly, there should be a loan element, as well. The benefits are not available for any new homes that the taxpayer might own.

✅ Can I avail the IT concessions for houses under construction?

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Yes, you can avail the IT concessions for houses under construction, but after the construction is complete. These benefits will be available from the financial year following the year of completion. You can spread out the interest payments over five years.

✅ Can I deduct municipal taxes and other statutory expenses from the rental income?

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Yes, you can deduct the taxes and other statutory expenses from the rental income when filing the IT returns.

✅ Is it compulsory to have an interest certificate from the banker?

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Yes, it is essential, as you would not be able to determine the interest and instalment breakup from the statement of accounts.

✅ Can I have one house in single and another in joint names, and still claim IT concessions?

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That should not be an issue at all. In the case of joint ownership, the IT concessions will also be available in the same proportion as your ownership.