Updated: Feb 18, 2022, 15:31 ISTShare:
A second home can add value to your investment portfolio. It can also be a huge source of wealth generation through rental income. If you plan to purchase it on the loan while already paying EMIs on the first one, know that you can claim tax benefits under Section 80C for this loan as well. Home loan repayments consist of principal and interest. Repayment of the principal amount is available for the tax benefit of up to ?1.5 lakh under Section 80C. This is applicable on both home loans. It also doesn’t matter whether the houses are self-occupied or rented in this case.
You can check your eligibility criteria for a home loan right now.
However, know that the tax treatment of interest paid on a home loan could differ in both cases.
Two Components Impacting Taxability of a House
There are 2 components of a house property that impacts taxability, Self Occupied Property (SOP), and Let-Out Property. Even if you don’t let out your second house, it is still considered “deemed to be let out” to be taxed appropriately.
Tax Benefit on Interest Payment
If you are holding a house for the self-consumption purpose, then as per Section 23 of the Income Tax Act, 1961, your gross annual income will be considered as NIL. For the second house, the notional rent is not taxable. Under the old tax regime, you can claim up to ?2 lakh as a deduction towards interest on the home loan, under Section 80C. As per the new regime, interest and principal repayment on housing loans are not eligible for tax benefit.
When you rent out one of your properties, you will have to declare the rental income when you file IT returns for the year. The actual rent received here is the gross annual value of the house. You will then deduct a standard deduction of 30% of the income, interest on the home loan, and municipal taxes paid during the year. If the net amount is more than the prescribed limit after deduction of these expenses, it will be added to your gross total income for the year and taxed according to your tax slab.
New Tax Law from FY19-20 Beneficial for Owners with 2 Houses
From the F.Y. 2019-20, you can now consider 2 houses as self-occupied, on a NIL basis. This means you can enjoy the benefit of “No Tax” on 2 house properties. The second property can’t be “deemed let out”. You can claim the interest paid on both the loans under Section 24, which can’t exceed above ?2 lakh in a year.
Thus, a second home can be used to diversify your portfolio or serve as your holiday home. Apart from the tax benefits of a home loan, now you don’t have to worry about taxability if it is self-occupied.