Double Whammy: Tax benefits of a second home loan

Most middle class investors in India are taking home loans to buy their first home either to live in or as an investment. Then there are those who are going to buy their second home. The returns one gets from real estate as an investment is second only to equity.

Everyone knows that getting a home loan entails many income tax benefits, but the benefits which follow a second home loan are not talked about as much and are often quite confusing. When you have a single home loan, the tax benefit is calculated after the annual value of the house property is discerned. This figure measures the amount for which your home might be expected to let out each year. The annual value of the house which you occupy, however, is zero.

The formula for income by your home is as follows:

Income from house property = rental income net of taxes (annual value) – standard deduction of 30% – interest paid on home loan.

For a single home loan, the principal is allowed as a deduction up-to a limit of Rs. 1 lakh and interest up-to a limit of Rs. 1.5 lakh.

When considering tax benefits in the case of dual home ownership, the favour is on the investor’s side. One home will be considered as being let out while the other will be considered as occupied. The owner of the homes is allowed to decide which home is considered for which category. It doesn’t matter if the let out property was fetching you rent or not – the government demands income tax on the home regardless.

The deduction on home loan for the second property goes as follows:

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).

Thus, taking a second home loan may seem like a confusing and daunting task, if implemented correctly, it can lead to a great deal of savings on income tax.

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