Tax Benefits on Second Home Loan

Sujoy, an IT manager in Mumbai, plans to buy a new house in his hometown Pune. Currently, he lives in his own home in Mumbai, that he bought on a loan. His wife understands the sentimental value the new home in Pune will have for Sujoy but is hesitant about if they can afford it. However, Sujoy has explained to her why buying a second house could offer tax benefits.

Here’s how a second home is taxed, explained along with the benefits available on it:

How does taxation of a second homework?

There are two components of a house property you need to know to understand its taxability: Self-Occupied Property (SOP) and Let Out Property.

Residential property that you use for your residence is known as self-occupied property (SOP), while the other is considered as ‘let out’ or rented.

Even if you do not rent out the other house, it is still considered as ‘deemed to be let out’, and accordingly, taxed.

The annual value of a house, which you treat as self-occupied, is computed to be nil. Therefore, there is no tax on your self-occupied property. However, your rental income is subject to tax. The actual rent received on your rental house is taxable under the head ‘income from house property’.

Even if the house is not on rent, it is deemed to be let out. In such cases, a notional rent value is considered as the gross taxable rent for such property and accordingly, the tax is calculated.

Moreover, if you happen to rent out both your houses and stay in a third property, the rental income of both the properties comes under the purview of tax. Similarly, as per the above example, if Sujoy buys the property on joint ownership with his wife and they take a joint Home Loan, taxation would also be split, based on the percentage of ownership between the two.

Tax benefits on a Home Loan for a second home

If you buy a second home on Home Loan, you can even avail of tax deductions on it.

While deductions under Section 80C on the principal amount of the loan may not be available in case of your second house, you can enjoy tax benefits on the interest component.

Earlier, in the case of rented or deemed rented house, the interest was fully deductible. In other words, if the interest payable on the loan taken for purchase of the second house was larger than the rent received, the remaining portion could be adjusted against your other income. However, now a limit of Rs 2 lakh has been imposed on such adjustment. The remnant portion of the interest, if any, can be carried forward for 8 successive years to be adjusted against income from house property only and under no other head.

In the case of self-occupied property, any additional income remaining after deduction of Rs 2 lakh can neither be carried forward nor adjusted against any other income.

To sum up

You could buy a second home to use it as a holiday home, or an investment or even to diversify your portfolio. Whatever the reason, it does not become a stressful affair for you. Along with tax benefits on Home Loans, when treated as self-occupied, it attracts nil taxability. On the other hand, when it is not maintained as your residence, you would need to consider the rental income from the property to calculate its taxability. Thus, before you plan to purchase a second home, along with exploring options for its interiors, and designing, also look into all the taxable aspects.

Read more about how to get smart on your Home Loan for tax benefits.

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​​​​​​​* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.