In 2017, Mr.A had taken a home loan for buying a home in Delhi . The home loan
amount was 15 Lakh tenure was 20 years and EMI was Rs.14976. He got transferred
to Mumbai before two years.
He could have sold the old house
and purchased a new house at Mumbai. But, he decided to purchase another house
instead of renting. He has taken a second home loan of Rs 15 lakh for 20 years,
for which EMI is about Rs.16, 550.
His total EMI outgo is 31526
Rs/-. Increasing floating interest rates are making his life difficult. He is
unable to manage hefty EMI amount for both home loans. In addition to that, the
earlier income tax interest exemption benefit under section 24 is now no more
reality. The maximum interest amount is capped at Rs.2 Lakh. He has no option
but to sell his first home.
There are many people in India who
builds a second home to earn extra income or for living purpose. Buying a
second home with the second home loan can be an attractive investment. However,
before you proceed, here are a few tax implications that you must consider.
Download Automated Income Tax Arrears Relief Calculator U/s 89(1) with Form 10E From F.Y.2018-19
Second Home Loan Tax Implication and Benefit
- If an individual is holding more than one property in his/her
name, only one property is considered as self-occupied. Its annual income
will be considered as NIL. Another property is considered as ‘deemed
rented out’ if it is not given on rent. This consideration is for income
tax purpose.
- You can select any property as self-occupied. It is not compulsory
that first property is only taken as self-occupied.
- If one house is rented out and second house is self-occupied,
actual rental income of rented house is considered for calculation of
income tax.
- If both houses are rented out respective rental income from
both properties is taxable.
- In case of joint ownership of property and home loan is taken
on joint names, rental income is computed corresponding to percentage
share of each co-owner.
- You can hold multiple properties in your name. There is no
restriction whatsoever.
Income Tax on Home Loan
Principal Component –
- Home loan principal payment is exempted under section 80C.
The maximum limit is 1.5 Lakh. This principal payment exemption rule is
applicable only on the first house. (self-occupied property). For second
home loan principal payment is not eligible for deduction under section 80
C.
- You can also avail principal payment exemption benefit if you
have let out or vacant property and you are staying in a different city
for the work.
- Above rule of principal exemption is not applicable on under
construction property.
Income Tax on Home Loan
Interest Component –
-
The tax exemption benefit on interest payment is allowed as per actual
subject to a maximum of Rs. 2 lakhs (Rs. 3 lakhs for senior citizens).
This condition is applicable for self-occupied for which construction is
completed within 5 years from the end of the financial year in which loan
is taken.
- For the second home or additional properties exemption on
interest is capped at lower of either 2 lakhs or actual interest payment.
If any additional interest payment is done it can be carried forward to
set off against house property income of subsequent 8 years.
Income Tax benefit from
Second House – Rented or Deemed let out
If your property is rented or
deemed let out, you need to use method given below to calculate Income or Loss
from Property.
If your property is rented
annual rental income must be known to you. If it is deemed let out, you need to
assume annual rental value based on market rates.
You can deduct municipal tax paid on the house. In addition to that 30%
standard deduction on rented income is allowed.
Income or Loss from
Property = Rental Income – Municipality Tax – Standard Deduction 30% – Interest
Paid
E.g Suppose your rented annual income
from second property is Rs. 90000. Municipality Tax is Rs.2000 and you are
paying Rs.120000 as a home loan interest payment. So, income or loss from the
property will be –
Income or loss from property =
Rs.90000 – Rs.2000 – Rs.27000 – Rs.120000 = -59000 Rs.
The negative income indicates it
is a loss from housing property and you need to reduce this amount from your
taxable income.
Should you buy Second
Home for Rented Income or Tax Benefit?
As per me, you should not buy a
second home for rented income or tax benefit due to following reasons.
- Maximum interest deduction limit for a second house is 2
Lakh. This limit is applicable FY2017-18, AY 2018-19 onwards. This means
you will not get that much tax benefit on a second home.
- A second house is considered as let out property (if not
rented) and you need to consider equivalent rental income while
calculating a tax.
Considering present income tax
rule and real estate market condition investing in second property is not
recommended option.