Homeownership is always a matter of pride, specifically in the Indian context where family traditions have attached an immense importance to this possession. Owning a second home is like taking this pride higher up. A second home not only adds to your net worth but also opens up an additional source of income and at the same time also holds the potential to open up tax-saving avenues for you.
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A common myth, which this blog intends to bust, is that the Income Tax rules are partial to your first home investment and the borrowing made for it. If you plan to buy your second home using the home loan leverage, this article will help you understand the nuances of the tax benefits on the loan for your second home.
The tax benefits on your 2nd home depend upon its end-use – let out vis-à-vis used for your own occupation.
A. For Let-out properties:
Property taxes paid:
The tax laws allow you to claim a deduction of all the municipal taxes paid on your 2nd property. This deduction is available only in the year in which the taxes are paid and not just accrued. So, if you receive your property tax bill for 2023-24 in January 2024 but you pay the same only in April 2024, then the deduction will be available for the financial year 2024-25 and not earlier.
Standard Deduction for repairs and maintenance:
You can claim an amount equal to 30% of the rental income (minus the property taxes claimed, if any) towards expenditure that you may have incurred towards its maintenance charges, painting, repairs or any other incidental expenses. This deduction is a straight deduction permitted against the income without having to keep any document trail for the expenditure incurred. Likewise, if you spend a sum totalling more than 30% of the rentals, this deduction is restricted to only 30%.
Interest paid on the loan:
Homeowners can claim a deduction (under section 24(b) of the Income Tax Act) of the interest paid on the loan taken for the purchase or construction of the 2nd home.
For let-out properties the deduction of interest is available without any limit. In other words, the entire interest paid can be claimed as a deduction from the rental income earned during a financial year. An important point to note here is that while the deduction is not limited, in cases where the interest paid is more than the rentals earned (quite typical for properties in cities), the resulting loss computed under the head ‘House Property’ can be claimed only to the extent of Rs. 2 lakhs p.a. and the balance will have to be carried forward to the next year (s).
To illustrate, if your 2nd property gives you a rental income of Rs. 5 lakhs (let’s assume this figure is post the deductions for property taxes and the standard deduction), but the interest that you have paid on the loans sums up to Rs. 8 lakhs in that year, then the loss computed herein would be Rs. 3 lakhs. You can claim a loss of Rs. 2 lakhs during this year and set-it off against other eligible incomes like salary, interest income and business income. The balance loss of Rs. 1 lakh can be carried forward to be eligible for set-off against incomes of that year. The losses, computed as such, are eligible to be carried forward for a maximum period of 8 years, after which they lapse.
In case you have booked your 2nd home in the under-construction phase and financed it with a home loan, then all interest paid during the pre-possession phase will have to be cumulated and the resulting total has to be claimed as a deduction in 5 equal parts, starting from the year in which you take possession of the flat. This pre-construction period interest is subject to the same deduction limits as described in the above paragraphs.
Principal repayment
Section 80C of the IT Act permits a deduction to be claimed towards the repayment of your home loan principal up to a limit of Rs. 1.5 lakhs p.a. per borrower. It may be noted that this limit of 1.5 lakhs is to be counted along with other permissible deductions like insurance premiums, provident fund contributions, etc.
B. For own-occupied properties:
For the 2nd homes that are being used for any purpose other than your business or for letting-out, you are allowed to only claim the deduction towards interest paid on home loans if any. The deduction is restricted to a maximum amount of Rs. 2 lakhs p.a. per borrower in such cases.
How to claim these deductions:
The important pre-condition for claiming any or all of the above deductions is that you need to file your tax returns and claim them. Mere incurring of expenditure doesn’t entitle you to these deductions unless you claim them in your tax returns.
In case you forget to file your tax returns within the due-date but file the same within the extended due date, you need to know that the belated filing of returns doesn’t deprive you of your right to claim and carry forward the loss from house property to later years.
It is equally (if not more) important that you maintain the right documentation in terms of the tax paid receipts, final interest certificates from the lending institutions, loan sanction letter, possession letter, lease agreements, tenant’s PAN, etc.
A second property not only provides financial security but if understood and implemented in the right manner, 2nd homeowners can optimize the tax benefits extended to such properties.
