Income Tax Benefit Second Home Loan: Deductions and Key Points

Introduction

Understanding Tax Benefits on a Second Home Loan

Extending your real estate portfolio with a second house property is a great way to inflation-proof your investment. However, owning a second property brings additional financial commitments, and you may need to consider a home loan. In such cases, the Indian tax regime offers some relief through tax deductions. 

If you’ve taken a loan for your second house, you can claim income tax benefit on the 2nd home loan, both on the interest paid and on principal repayment. 

But how exactly? Read on to find out…

How Second Home Loans Are Treated Under Income Tax Act

As per the Income Tax Act, when you buy a second home using a loan, it is classified as either self-occupied, rented, or vacant. Each of these scenarios affects the two home loan income tax benefits you can claim. For example, rented properties are taxed under “income from house property” with some adjustments allowed, while vacant second homes may attract notional rent tax. 

Let’s break down the tax treatment in each case.

Tax Benefits on Interest Payment for Second Home Loan

Section 24(b) – Deduction on Interest Paid

Interest paid on your second home loan can be claimed as a deduction under Section 24(b) of the Income Tax Act. The income tax benefit on the 2nd home loan under this section depends on whether your property is rented or self-occupied.

If your second home is rented, there is no upper limit; you can claim the entire interest paid during the financial year. If it is self-occupied or vacant, the deduction is capped at ₹2 lakh for all properties combined.

Under the old tax regime, this benefit is available as per Section 24(b). However, if you opt for the new regime, you will not be able to claim this deduction for a self-occupied second home. The benefit continues if the second home is let out.

Limit of Deduction on Interest

For example, say you already pay ₹90,000 per year in interest on your first home loan. If you take a second home loan with ₹1.5 lakh interest paid annually, you can claim a total deduction of ₹2 lakh under the old regime (₹90,000 + ₹1,10,000). Any excess cannot be claimed for self-occupied homes.

For rented second homes, if your second loan’s interest is ₹2.5 lakh per year, you can claim the full ₹2.5 lakh, no cap applies here, whether under old or new regime (only if let-out).

Conditions to Avail Full Deduction

To claim the income tax benefit second home loan under Section 24(b), ensure that:

• The loan is for construction or purchase, not for repairs.
• The construction is completed within 5 years of taking the loan (for self-occupied).
• Proper interest certificates from lenders are kept ready.
• Rental income, if applicable, is declared in your tax filing.

Tax Benefits on Principal Repayment for Second Home Loan

Section 80C – Deduction on Principal Payment

The principal portion of your second home loan EMI is eligible for deduction under Section 80C of the Income Tax Act. You can claim up to ₹1.5 lakh annually under this section. This two home loan income tax benefit on principal is subject to the overall ₹1.5 lakh cap for all Section 80C investments like ELSS, PPF, or life insurance.

This benefit is only available under the old tax regime, not under the new one, whether your second home is self-occupied or rented.

Eligibility for Principal Repayment Deduction

You must ensure:

• The property is registered in your name.
• The loan is taken from a recognised bank or financial institution.
• The property is not sold within 5 years of taking possession—if sold earlier, prior benefits will be reversed.

It is worth noting that the income tax benefit on 2nd home loan principal repayment applies even if the house is vacant or let out, as long as you are in the old regime.

Lock-in Period for Claiming Principal Deduction

Once possession is received, you can claim the principal repayment deduction. However, if you sell the property within 5 years from the financial year of possession, the benefits claimed earlier will be added back to your taxable income in the year of sale.

If you’ve also paid stamp duty and registration fees, you can claim them under Section 80C, within the ₹1.5 lakh cap, in the year they are incurred.

How to Claim Tax Benefits on Second Home Loan

Documents Required for Claiming Tax Deductions

To claim deductions for both interest and principal repayment, you will need:

• Interest certificate from your lender
• Loan statement with EMI breakup
• Completion certificate or possession letter

Filing the Deductions in Income Tax Return

If you could not submit documents to your employer, you can still claim two home loan income tax benefits while filing your Income Tax Return. Use the correct ITR form based on your income sources, including tax on mutual funds, salary, rental income, or capital gains.

Report the home loan interest under “Income from House Property” in the ITR form. Ensure you also claim principal repayment under “Deductions under Chapter VI-A,” Section 80C, if applicable. Plus, if excess TDS was deducted by your employer, you can claim the refund when filing your ITR. 

While filing, it’s also helpful to understand overall tax treatment across your investments, whether related to tax on mutual funds or your home loans, so that there is no mismatch in your tax records.

Important Points to Note

Tax Implications if Second Home is Rented

If the second home is rented, the entire rental income is taxable after deducting property taxes paid and 30% standard deduction on maintenance.

Deemed Rent Concept for Vacant Second Home

If your second home is vacant, the tax department may apply the concept of deemed rent, meaning you need to declare notional rental income based on market rates, which could increase your taxable income.

Impact on Overall Taxable Income

Whether your second home is rented or vacant, it impacts your taxable income. If rental income is high, it may increase your taxable income. On the other hand, interest deductions and other expenses can help lower your tax liability. This is why understanding the right deductions and using exemptions vs deductions wisely is important when planning taxes for multiple properties.

Recent Updates on Tax Benefits for Second Home Loan

Changes Introduced by Union Budget

Recent announcements in Union Budgets have not expanded deductions specifically for second homes. However, with growing emphasis on affordable housing, future benefits may evolve.

Impact of New Tax Regime on Second Home Loan Deductions

Under the new tax regime, deductions under Section 80C and Section 24(b) on second home loans are not allowed. If you wish to claim an income tax benefit on a 2nd home loan, you should opt for the old tax regime. It is also useful to review how TDS in India applies to different sources of income, including rental income, when planning your overall tax strategy.

Conclusion

Maximizing Tax Savings Through Proper Planning of Second Home Loan

With good planning, you can optimise your tax benefits on a second home loan. Keep your documents organised, choose the right tax regime, and declare income accurately. Using stock advisory services or consulting a tax professional can also help align your second home investments with your broader financial goals.

FAQs

1. Can I claim tax benefits on both homes if I have two loans?

Yes, two home loan income tax benefits are allowed, provided you declare the income and meet eligibility conditions under Section 24(b) and Section 80C.

2. What if the second home is self-occupied?

If self-occupied, the interest deduction is limited to ₹2 lakh annually.

3. Can I claim full interest deduction if the second home is vacant?

No, the concept of deemed rent applies to a vacant second home, and deductions are limited.

4. Does the new tax regime impact second home loan deductions?

Yes, second home deductions are not allowed under the new tax regime. You must choose the old tax regime if you want to claim them.

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