Tax Benefits on Second Home Loan – How to claim them?

For most individuals, owning a second home is more of a strategic financial decision rather than a luxury. This is because a second home can serve as an investment, rental income source, or vacation retreat. However, individuals must be aware of the financial implications of owning a second home, especially in terms of taxation. Knowing the fact that the Indian Tax system provides various benefits can help reduce tax liabilities. The article explains tax benefits on second home loan according to various eligibility criteria and how individuals can claim them.

Various Tax Benefits Available on Second Home Loan

Many individuals apply for a second home loan to purchase a second property apart from their initial self-occupied property. Such individuals become eligible for certain tax deductions that can be claimed on repayment of principal and interest paid under the Income Tax Act. Let us understand some of them in detail.

Tax Benefits on Principal Repayment Under Section 80C

Home loan borrowers can claim a deduction while repaying the principal amount of their second home loan under Section 80C of the Income Tax Act with the below-mentioned limitations.

• Under Section 80C, the maximum deduction allowed is Rs. 1.5 Lakh per year.
• The above limit includes other eligible investments such as life insurance premiums, EPF contributions and tuition fees as well.

However, if the homeowner sells the property within five years of purchase, the tax benefits claimed will be reversed.

Tax Benefits on Interest Payment Under Section 24B

The major benefit of the second home loan tax benefits is on interest paid.

• If the individual rents the second home, the entire interest paid on the loan is deductible under Section 24B, without any upper limit.
• If the second home is occupied by the homeowner, the maximum interest dedication is Rs. 2 lakh for every year.
• If the second home remains vacant, it will be considered as “deemed let out” during taxation. Furthermore, a national rental income will be added to your taxable income.

Tax Benefits on Interest Payment Under Section 80EEA

If a first-time homebuyer is purchasing a second home under the affordable housing scheme, they can claim a deduction of Rs. 1.5 Lakh under Section 80EEA. However, these deductions are subject to the conditions mentioned below.

• The stamp duty value of the property should be below Rs. 45 Lakh.
• The loan must be sanctioned between 1st April 2019 and 31st March 2022.
• When the loan is being sanctioned, the individual must not own any other residential property.

Tax Benefits on Loss From House Property and Joint Home Loans

If the amount of interest paid by an individual on their second home loan is greater than the rental income, they can claim the following deductions:

• The maximum loss that can be claimed from house property (including interest paid) is restricted to Rs. 2 lakh. 
• A loss exceeding Rs. 2 Lakh amount can be carried forward for set off against income from house property for the next eight assessment years.

Furthermore, if the second home loan is taken along with a spouse or parent (jointly), both borrowers can claim tax deductions separately under the conditions mentioned below.

• Each borrower must contribute to the loan repayment.
• A total of Rs. 1.5 Lakh can be claimed for tax deductions on principal repayment under Section 80C.
• If the property is self-occupied, a deduction of Rs. 2 Lakh can be claimed on interest payments.
• If the property is rented out, the interest deduction is not limited to any amount.

Claiming Tax Deductions On Second Home Loan

Homeowners can follow the steps given below to claim tax benefits on their second home loan.

Step 1: Acquire Loan Statement: Individuals must obtain a loan statement from their lender that specifies the principal amount that is repaid, interest that is paid and the outstanding amount of the loan.

Step 2: Declare Details of the Home Loan in the ITR: While filing their Income Tax Return (ITR), individuals must declare rental income (if applicable) or deemed rental value under the “Income from House Property” section. Furthermore, they must add the interest paid under deductions and the principal repayment under Section 80C.

Step 3: Submit Proofs For TDS Deductions and Carrying Excess Loss Forward: Salaried employees should submit proof of principal repayment and interest payment to their employer for correct TDS deductions. Furthermore, if the loss amount is more than Rs. 2 Lakh, individuals can carry forward the excess for up to eight years for adjustment against future rental income.

Conclusion

A second home loan can be useful for reducing tax liabilities. However, to make the most out of property that could be used for personal use or acquiring rental income, individuals must understand the second home loan tax deduction. While claiming these tax deductions, individuals must carefully document their loan details and correctly declare them in their tax filings to optimise tax savings.

FAQs on Tax Benefits on Second Home Loan

Can I simultaneously claim tax benefits on two home loans?

You can claim tax benefits on two home loans. However, the deductions may vary on whether the property is rented or self-occupied.

What happens in terms of taxes if my second home is vacant?

For homeowners whose second home is vacant, their property will be considered as “deemed let out” during taxation. Furthermore, a national rental income will be added to your taxable income.

What is the upper limit on interest deduction for a second home loan?

The maximum interest deduction for a self-occupied second home is Rs. 2 lakh per year.

What documents do I need to submit to claim tax benefits on a home loan?

Individuals need to provide a loan sanction letter, a home loan statement that shows principal and interest breakup and a rental agreement.

Can co-owners of a property get separate tax benefits?

Yes. Co-owners can separately claim tax benefits in proportion to their ownership percentage if they both are co-borrowers in the loan.