Second Home Loan Tax Benefits

Home Loans offer many attractive features. Unlike other types of loans, they feature lower interest rates, longer repayment terms, moderate eligibility criteria, and associated tax benefits. Though home loan borrowers know these benefits, many buyers doubt whether tax benefits on such loans are allowed if taken for the second time. Well, the answer is ‘yes,’ you can avail of the tax benefits for a second home loan, subject to Section 80C and Section 24 of the Income Tax Act. This all-in-one guide presents a complete overview of the home loan tax benefit for a second home. We primarily detail the applicable benefits, the relevant updates from the Budget 2024, the application process, and nearly everything pertinent to the second home loan tax benefit. Let’s get started!

Budget 2024 Update on Taxation for Second Home Loan Under New and Old Regime

Budget 2024 has introduced several changes to the second housing loan tax exemption. Hereunder, we present both new and old tax regimes separately, as the changes can impact both in slightly different ways:

Old Tax Regime

Here is the available home loan tax benefit for a second home, applicable to those who opt for the Old Tax Regime:

• Interest Deduction: You can claim up to ₹2 lakh per year on interest paid for home loans, including those for second homes if they are self-occupied or vacant, and if rented out, you can claim the entire interest amount.
• Principal Repayment: You can claim up to ₹1.5 lakh per year on principal repayment, including for second home loans, whether self-occupied or rented out.

New Tax Regime

Following are the second home loan tax benefits available to those who opt for the New Tax Regime:

• No Deductions: This regime does not offer tax deductions or exemptions for home loan interest or principal repayment, as it is typically crafted to lower tax rates but no deductions.
• Tax Rates: The new regime has revised tax slabs. To illustrate, taxpayers with an income between ₹6-7 lakh now pay 5% instead of 10%, and those earning between ₹9-10 lakh pay 10% instead of 15%.

Eligibility Criteria for Second Home Loan Tax Benefits

Here are the applicable eligibility criteria for a second housing loan tax exemption:

• Ownership: You must already own one house property, and the second home should be registered in your name or jointly with another person.
• Purpose of Loan: The loan must be taken specifically to purchase or construct the second house property.
• Completion of Construction: The construction of the second home must be completed within five years from the end of the financial year in which the loan was taken.
• Compliance with Tax Regulations: Ensure compliance with all tax regulations and documentation requirements to claim these benefits.

Documentary Requirements for Claiming Tax Benefits

You must possess the following documents to avail of the tax exemption for a second home loan:

• Loan Agreement: A copy of the loan agreement with the lender detailing the terms and conditions of the home loan.
• Interest Certificate: An annual interest certificate from the lender detailing the total interest paid during the financial year.
• Principal Repayment Statement: A statement from the lender showing the principal amount repaid during the financial year.
• Property Documents: Proof of property ownership such as sale deed, payment receipts, or property registration papers.
• Completion Certificate: Once the construction is completed, a completion certificate from the builder or relevant authority is required for under-construction properties.
• Rental Income Documentation: If the second home is rented out, documents like the rental agreement and rent receipts are necessary to show the rental income earned.
  Additional Documents: Bank Statements, Income Tax Returns, PAN Card, and Form 12BB.

Tax Deduction on Interest Paid for Second Home Loan

When you take a loan for your second home, the interest you pay can be claimed as a deduction from your taxable income. The maximum deduction on interest paid for self-occupied properties is ₹2 lakh per annum under Section 24(b). For rented properties, there is no cap on the interest amount you can claim as a deduction. However, the overall net loss from house property that can be adjusted against other income is limited to ₹2 lakh per annum. This benefit can significantly reduce your tax liability, especially if your second home is an investment property generating rental income.

Tax Deduction on Principal Repayment for Second Home Loan

Principal repayments on your second home loan are eligible for tax deductions under Section 80C of the Income Tax Act. This section allows a deduction of up to ₹1.5 lakh per annum, which includes other eligible investments and payments like PPF, NSC, and life insurance premiums. It is essential to note that these deductions are available only after the construction of the property is complete and possession is taken. Thus, understanding and utilising this deduction can help reduce your taxable income.

Impact of Rental Income on Second Home Loan Tax Benefits

When you let out your second property, the rental income is added to your total income and taxed according to your income tax slab. However, you can claim several tax exemptions for a second home loan that can reduce your taxable income:

• Interest on Home Loan: Under Section 24(b), you can claim a deduction on the entire interest paid on the home loan for a let-out property.
• Standard Deduction: You can claim a standard deduction of 30% on the property’s net annual value (NAV).
• Principal Repayment: Under Section 80C, you can claim a deduction of up to ₹1.5 lakh per year on the principal repayment of the home loan.
• Municipal Taxes: Any municipal taxes paid during the year can be deducted from the rental income before calculating the taxable income.

How to Calculate the Overall Tax Benefit on a Second Home Loan?

You can easily calculate the second home loan tax benefit by following the steps given below:

• Visit a reputable online home loan tax benefit calculator.
• Input the financial year for the assessment of your home loan tax.
• Select your category, such as male, female, or senior citizen.
• Enter your annual income in the designated field.
• Provide the principal amount repaid during that financial year.
• Enter the interest amount paid for the same year.
• Add any deductions you have under Section 80C.
• Click on the ‘Calculate’ button to see your results.

Process to Claim Tax Benefits on Second Home Loan 

Have a close look at the following steps to claim home loan tax benefits for a second home:

• Understand Eligibility: Ensure you are eligible for a second housing loan tax exemption. The loan should be for buying or building a second home, whether self-occupied or rented.
• Know the Tax Deductions Available: Familiarise yourself with deductions under Sections 24(b) and 80C. Section 24(b) allows interest deductions, and Section 80C covers principal repayment, subject to specified limits and conditions.
• Collect Necessary Documents: Gather all required documents like loan sanction letter, repayment schedule, interest certificate, property ownership proof, and rent receipts if the property is rented out.
• Compute the Total Interest Paid: Calculate the total interest paid on your second home loan during the financial year, using the interest certificate from your lender to claim the correct deduction.
• Fill Out the Income Tax Return Form: Enter home loan interest and principal repayment details accurately in the ITR-1 or ITR-2 forms, ensuring all information matches your loan statements and certificates.
• Declare Rental Income: Declare rental income under ‘Income from House Property’ if your second property is rented out. Deduct the interest paid on the loan from this income to claim the full interest deduction.
• Submit the Required Documents: Submit necessary documents like the interest certificate, ownership proof, and rent receipts with your income tax return, uploading them as supporting evidence when filing online.
• Verify and E-File Your Return: Verify all details in your tax return, e-file it through the Income Tax Department’s portal, and ensure accuracy to avoid discrepancies or potential audits.
• Keep Records for Future Reference: Maintain copies of your filed return, interest certificates, and supporting documents for future reference, as they may be needed for queries or audits by the Income Tax Department.

Example of Tax Benefit on Second Home Loan

Understanding the applicable tax exemption for a second home loan can significantly enhance your financial planning and reduce your overall tax liability. A detailed example given below illustrates how these benefits work, especially in the context of the latest regulations for 2024.

Scenario Overview

Consider a situation where you have taken a second home loan with the following details:

• Loan Amount: ₹50,00,000
• Interest Rate: 8%
• Annual Interest Paid: ₹4,00,000
• Principal Repaid: ₹1,20,000

The property is let out, generating an annual rental income of ₹3,00,000. Additionally, you pay municipal taxes amounting to ₹30,000 per year.

Calculation Process

Let’s examine the calculation parts of the home loan tax benefit for a second home:

• Interest Deduction Under Section 24(b):  For a let-out property, there is no upper limit on the interest deduction under Section 24(b) of the Income Tax Act. However, the net loss from house property that can be adjusted against other income is capped at ₹2 lakh per year. Thus, you can claim the full interest paid of ₹4,00,000 as a deduction. But due to the cap, you can only set off ₹2,00,000 against other income sources in the same year. The remaining ₹2,00,000 can be carried forward to future years for set-off against rental income from house property.
• Principal Repayment Under Section 80C: Under Section 80C, you can claim a deduction on principal repayments up to ₹1.5 lakh per annum. In this example, the principal repaid during the year is ₹1,20,000, which is fully deductible under this section.
• Adjusting Rental Income: Next, calculate the net rental income. The annual rental income is ₹3,00,000, and after deducting municipal taxes of ₹30,000, the net annual value (NAV) is ₹2,70,000. A standard deduction of 30% is applicable on this NAV, amounting to ₹81,000. Thus, the taxable rental income becomes ₹2,70,000 – ₹81,000 = ₹1,89,000.

The total deductions available in the current year are ₹2,00,000 (interest) + ₹1,20,000 (principal) = ₹3,20,000. This amount reduces your taxable income, while the taxable rental income of ₹1,89,000 will be added to your total income.

Common Mistakes to Avoid When Claiming Second Home Loan Tax Benefits

• Incorrect Property Status: Ensure you correctly declare if your second home is self-occupied, rented out, or deemed let-out. Incorrect status can lead to wrong deductions and penalties​​.
• Missing Interest Deduction Caps: The interest deduction is capped at ₹2 lakh per year for self-occupied homes. You can claim the full interest for let-out properties but only set off up to ₹2 lakh against other income​.
• Forgetting Pre-Construction Interest: Interest paid during construction can be claimed in five equal instalments after completion. Many taxpayers fail to claim this pre-construction interest, missing out on potential deductions​.
• Overlooking Five-Year Completion Rule: If the construction of the property exceeds five years, the interest deduction is limited to ₹30,000 per year. It’s important to track construction timelines to claim the correct deduction amount.
• Poor Documentation: Maintain records like loan sanction letters, interest certificates, and ownership proof. These documents are essential when claiming tax benefits and in case of any scrutiny by the tax authorities.
• Incorrect Rental Income Adjustment: An accurate calculation is vital ​to fully availing the second home loan tax benefit. For rented properties, declare rental income and adjust it by deducting municipal taxes and a 30% standard deduction.
• Missing Municipal Tax Deductions: Municipal taxes paid can be deducted from the rental income before applying the standard deduction. This is often overlooked, leading to higher taxable income from the property.
• Premature Principal Repayment Claims: Under Section 80C, deductions on principal repayments can only be claimed once the construction is complete. Claiming this deduction prematurely can lead to unnecessary issues.
• Not Consulting a Tax Professional: Tax laws can be complex and frequently change. Consulting a tax professional can help you navigate these complexities, ensuring you claim all eligible deductions and comply with current tax regulations.

Frequently Asked Questions on Second Home Loan Tax Benefits