Purchasing a second home can significantly improve the value of the investment portfolio. Besides, borrowers can use their second home to initiate income by letting it out.
In this regard, the Income Tax Act 1961 introduced special provisions to incentivise borrowers regarding tax benefits on a second home loan. This allows customers to avail deductions on both the principal and interest components.
To understand and claim tax benefits on a home loan, read on.
Available tax benefits on second home loan
Availing a home loan is always a long-term financial commitment. Borrowers need to pay off EMIs within a specified tenor to avoid legal complications.
Nonetheless, this guide will allow borrowers to avail tax benefits on a second home loan without hassles:
- Deductions under Section 80 (C)
Under this section of the IT Act, eligible home loan borrowers can enjoy tax benefits on repayments for self-occupied properties. This section states a deduction of up to Rs.1.5 lakh on the principal repayment as per the rules. This deduction is applicable for both the first and second properties.
However, borrowers must know that the second property that is occupied by tenants or remains vacant will be considered self-occupied. This deduction also encompasses stamp duty and registration charges, investments such as PPF, ELSS etc.
To learn about the exact deduction of principal amount from the EMIs, borrowers must know how to calculate EMI with the help of EMI calculator. By knowing the amount, they can evaluate how much they can claim for the deductions.
- Deductions under Section 24
Under this section, borrowers can avail of tax benefits on a second home loan on interest payment. In addition, this section allows eligible borrowers to claim deductions on the interest component of up to Rs.2 lakh in a financial year.
If an individual possesses two houses, then the interest paid on both home loans will be eligible for deduction as per this section. However, borrowers must note that the overall deductions on the interest component for both houses must not exceed Rs.2 lakh in a particular year.
Here are the primarily two conditions to claim the tax benefits on second home loan:
- As per new regulations, if one property is self-occupied while the other is vacant, the self-occupied one will not be considered let out. Hence both properties will be considered self-occupied.
- If one property is self-occupied while the other is rented, borrowers need to reveal the rent earned from the second home. Borrowers can receive a deduction of 30% on paying municipal tax and interest payments against home loans. Besides, tax payers can claim tax benefits of up to Rs.2 lakh on other income sources.
Above all, borrowers must research the current home loan interest rate prevailing in the market and settle for one that suits their affordability. Knowing these sections and their benefits will aid borrowers in saving considerably on repayments.
Rules for claiming tax benefits on a second home loan
To claim tax benefits on second home loans, borrowers must ensure that both first and second home loans are under their names. Moreover, they can also submit home loan interest certificates and sanction letters to the employer for TDS deductions.
Considering the rising cost of real estate in the country, such tax exemptions make borrowing affordable. Furthermore, if borrowers opt for the right lender, they can enjoy a favourable borrowing experience.
Also, opting for home loans from reputed financial institutions will allow existing borrowers to get the benefit of pre-approved offers on a range of financial products, such as LAP, home loan, etc. These offers significantly expedite the loaning process and reduce the hassle of extensive documentation. To check pre-approved offers, borrowers must mention their names and contact details.
Hence, potential borrowers must consider the factors involving application and tax benefits on a second home loan. Individuals planning to purchase a second home and apply for a home loan need to explore various rates and offers extended by financial lenders to maximise benefits.
