Many middle class investors in India, especially those from the IT sector, are buying houses. Then there are many who are buying their second homes.
Returns from real estate as an investment avenue is only second to equity. And to make it more simpler, you have home loans to assist you in buying your loved property.
Today we will check on what are the income tax benefits on a second home loan in India. Income tax benefits of second home ownership is often confusing and I hope this article will clarify on the basics.
The basics first
Before we go ahead, it might make sense to understand how things operate when you have a single home loan.
First, understand what annual value of house property is and how it is calculated. Note that this figure measures the amount for which your home might be expected to be let out each year. Also note that the annual value of the house which you occupy is nil (zero).
Once you understand this term, you can then figure out how income from house property is calculated.
To recap the formula, it is :
Income from house property = Rental Income net of taxes (Annual Value ) – Standard deduction of 30% – Interest paid on home loan
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If the house is let out, you will get rent and as you can see from the above formula, you will have to calculate the rent received and pay tax on it.
For a single home loan that you might have, the principal is allowed as deduction up-to a limit of Rs 1 lakh and interest up-to a limit of Rs 1.5 lakh.
What happens if you have 2 home loans ?
The income tax benefits of second home ownership in India are favoring the investor. Here are the specifics.
One home will need to be considered to be let out while the other needs to be considered to be self occupied. You can pick any of the houses for such a purpose. It does not matter whether the let out property was fetching rent or not or was lying vacant – the government asks you to pay income tax on it even if you got no rent.
That’s a let down ? Not really – check out the deduction on home loan interest for the second property.
# Full interest on home loan is allowed as deduction for the let out property – so there is no limit of Rs 1.5 lakh as was the case in a self occupied property.
# As far as principal is concerned, for all the properties one has, the total deduction is subject to Rs 1 lakh.
Suppose a person has two houses with the below details. He is paying interest of Rs 80,000 and Rs 125,000 on them during one financial year. The annual value of the houses has been arrived at already and shown below.
Now the question is, which house should the investor self occupy and which one should he let out to avail of maximum income tax benefits. Note that the principal component of tax savings has not been considered here as even if the home loan principal contribution does not add up to Rs 1 lakh, the other Section 80C deductions more than make up for it. So the interest component of the home loan is only considered here.
House 1 is self occupied
In this case, the NAV of house 1 is zero as it is self occupied so the standard deduction is also not applicable. The income from house property comes to Rs -80,000 and Rs -8,100 for both the houses. So the total interest deduction is Rs – 88,000.
House 2 is self occupied
When house 2 is self occupied, the figures change a bit. The income from house property in the self occupied house in this case is Rs – 125,000.
The total interest deduction is Rs -111,200 which is better than when house 1 was self occupied. So to maximize the interest deduction, house 1 should be put on rent and house 2 should be self occupied.
What are your thoughts on the tax benefits on a second home loan ?