Here’s how to maximise tax benefits with 2 home loans

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New Delhi | Updated: September 30, 2016 7:23:47 AM

If you are thinking of buying your second home, here is some information to drive you in the right direction in terms of managing two home loans and increasing your tax benefits.

The tax treatment for home loans is determined based on which of your properties is self-occupied. The other property is automatically considered rented out, whether or not it has actually been rented.The tax treatment for home loans is determined based on which of your properties is self-occupied. The other property is automatically considered rented out, whether or not it has actually been rented.

If you are thinking of buying your second home, here is some information to drive you in the right direction in terms of managing two home loans and increasing your tax benefits.

Tax benefits with two home loans

The tax treatment for home loans is determined based on which of your properties is self-occupied. The other property is automatically considered rented out, whether or not it has actually been rented. For the property that you have deemed self-occupied, you are liable for tax relief both on the interest and principal amount you’re paying towards your home loan. You can claim a tax deduction of up to R1.5 lakh under Section 80C on principal repayment and R2 lakh under Section 24(B) for interest repayments.

For a second home loan, you will get tax deductions only on the interest repayment and not on the principal repayments. There’s no ceiling to the deductions towards interest payments on the second home loan. Therefore you can claim deductions on the actual interest paid. Also, tax benefits for the second home loan is limited for an under-construction property. You can avail a deduction on 20% of the total interest paid during the pre-construction phase for a five-year period.

Eligibility and managing debt

Let’s assume that you’ll take another home loan to fund the purchase of your second property. This could mean that you are servicing two or more loans simultaneously, and this could strain your finances. Let’s take a look at how best you can manage this situation.

Settle your existing debts: It’s rarely easy paying multiple equated monthly instalments (EMIs). If you can close existing debts—be it your loans for car or home, a personal loan, or an outstanding credit card balance—it would strengthen your financial position, and also increase your eligibility for a new loan.

Use the 40% yardstick: You should avoid over-leveraging. Ideally, your total loan EMI payments should not cross 30-40% of your monthly salary. If they do, it may be advisable to not take further credit. Lenders also will not be inclined to provide you further credit.

Calculation of second loan: Banks will check your first home loan EMI payments and decide on the EMI for your second home loan. They will consider your monthly salary minus your first EMI and other fixed loan obligations as your repayment capacity irrespective of your monthly earnings. If you are paying a high home loan EMI for your current loan, your repayment capacity would get reduced proportionally, impacting the EMI of your second loan.

Reason for your investment: Have clear reasons for buying a second home. If you are looking for a second home as an investment, compare the returns on such an investment with returns from other financial instruments. If the idea is to earn a rental income, make sure to check your tax liability.

The writer is CEO, BankBazaar.com

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