Have you considered purchasing a second home? A house is more than just a place to live; it is an asset to be treasured. And if you have the means to invest in a second asset, you should! However, there are other decisions to be made before investing in a home. You’ve already been making EMI payments on your present house. Will you be able to obtain a second mortgage as easily? Consider getting a second home loan, which will not only provide you with a more comfortable living space but will also save you money on taxes.
With an example, let us learn more about the tax treatment of a second home loan.
Assume Mr. Singh, a 38-year-old businessman, owns one house in Pune for which he pays EMIs (Equated Monthly Instalments). He is now planning to relocate to Delhi in search of better business possibilities. As a result, Mr. Singh rents out his home in Pune to finance the EMI. And, instead of renting, he decides to buy a new home in Delhi.
Is Mr. Singh now qualified for a second house loan? Is he eligible for a second house tax credit?
Mr. Singh can, in fact, take out a second mortgage and receive a tax deduction for it.
Here’s how you can get a tax break on your second mortgage:
Section 80C: Under Section 80C, you can claim a deduction on the principal amount up to Rs. 1.5 lakh. This deduction can be claimed on many properties, regardless of whether they are self-occupied or rented out.
Clause 24(b): Under this section, you can deduct interest payments up to a maximum of Rs. 2 lakhs.
There are two possibilities here:
- Both residences are self-occupied: According to the most recent budget provisions, the second property cannot be considered rent. As a result, both properties will be considered self-occupied. The total interest paid on both residences should be less than Rs. 2 lakhs.
- Self-occupied first home rented second home: The rental income from the second residence must be declared. You can deduct a typical 30 percent interest on a home loan and municipal taxes from that. You can deduct up to Rs. 2 lakhs from your other sources of income.
Tax Benefits for Second Home Loan:
Those who own two homes are eligible for a bevy of tax breaks. However, if you have previously paid off your house loan in full, you will not be eligible for this benefit. Let’s take a closer look at those advantages.
- Self-Occupying the Second Home: If you have more than one residential property for your use, as clearly stated in the Income Tax Act provisions, one of the two houses of your choice will be considered self-occupied, and its yearly value will be zero. According to the provisions, the other place will be considered a let-out and a speculative rent, and will be taxed under the heading ‘Income from House Property.’
- Examining the Tax Implications of Vacant Property: If you own two ‘Self Occupied Properties’ (SOP), you can choose to treat one of them as SOP. The remaining house(s) will be classified as ‘Deemed Let-Out Property’ (DLOP) under the Act. If one of your properties is a DLOP, it is considered a rental property. As a result, a fictitious rental value will be applied to the taxable income. Maintenance and general upkeep are eligible for a 30 percent flat reimbursement.
- Using the Second Home as a Vacation/Retirement Retreat: Because the self-occupied asset benefit is only available for one property, the assessed yearly rent will be considered the taxable value.
- Renting or leasing out a second house: If you buy a second property to rent or lease, the actual rent you make will be considered taxable income, subject to certain rules.
- Municipal Tax Deduction: Municipal taxes, in general, are allowable as a deduction in the fiscal year in which they are paid. This is true whether the taxes are for the current fiscal year or the previous fiscal year.
- Deducting Interest: Whether your second property is technically let-out or substantially let-out, you can deduct the real interest paid on the house loan. This is in contrast to the case of a self-occupied property, where the maximum interest rate on a home loan is capped to INR 1.5 lacs per year (INR 2 lacs from AY 2015-2016), subject to specific criteria.
Tips for Experienced Home Buyers for Second Home Loan:
Do you have second thoughts about making an offer on your second home in this hot market? It will most likely become a good investment or a place to live in your golden years. It’s not a good idea to be arrogant about your home-buying experience. Real estate is a constantly changing market, and changes in trends and pricing are always dramatic and abrupt.
Before you acquire your second home, keep the following tips in mind:
- The mantra ‘Location, Location, Location’ applies here as well.
- Learn about the neighborhood and be certain of your motivation for making this purchase, whether it’s for tax benefits, an investment, or a house for your retirement years.
- If you intend to rent or lease the property, determine its true rental viability. Also, confirm that the space matches the expectations of the renters and consult with the neighborhood/residence association for additional information.
- Get an estimate of all the costs that could be incurred. Are you still paying the EMI on your first home loan? Then, make sure you’re eligible for the funds you’ll require. The rules for interest rates may alter for second-time buyers.
The Following are the Steps to Claiming a Tax Credit:
- Check to see if the residential property is registered in your name. If you have a combined home loan, ensure sure you are listed as a co-owner of the home.
- Calculate the total amount you can claim as a tax deduction.
- Submit your home loan interest certificate to your employer to get the TDS corrected. If you are unable to complete this step, file your IT returns instead.
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