A second home loan may seem daunting, but if implemented correctly, can lead to a great deal of savings on income tax
Many people in India buy a second home for various reasons. It can be as an investment for capital appreciation, for use as a holiday home, to get a regular stream of income by way of rentals or to diversify their investment portfolio. The return on real estate as an investment is second only to equity and this makes investment in real estate a must-have in the portfolio of an investor.
In India, a bulk of the home loan is taken by customers to buy their first home to live in and everyone knows that getting a home loan entails several income tax benefits, but the benefits which follow a second home loan are not talked about as much. So primarily, due to little awareness around the tax implications of the second home, and lack of knowledge of the benefits, most people don’t even consider it. A second home loan may seem like a daunting task, but if implemented correctly, can lead to a great deal of savings on income tax.
Second home self-occupied
You can avail deduction on interest paid towards home loan. An individual who has taken loan for the second house is eligible to claim deduction, under Section 24 for the interest he has paid towards the loan amount. There is also no maximum limit for the exemption on interest paid on the second home loan. However, an individual in this case will not be eligible to claim any exemption under Section 80 C as the second home will not be considered as self occupied property. For example, if an individual has taken a second home loan and he has paid R1 lakh as interest and R50,000 as principal amount for a year, he can then claim income tax benefit on R1 lakh.
You can avail deduction on interest during the pre-construction period. An individual who has a second home loan for an under-construction property can claim tax deduction on 20% of total interest paid during the pre-construction period. The maximum time limit to avail this tax benefit is five years. For example, if a second home loan tax benefit for interest during under construction or pre-construction period is R1.5 lakh, an individual can claim R30,000 per year for five years and not beyond.
Claim taxes paid to local bodies
An individual can also claim tax deduction on the taxes paid to the local authorities in the financial year in which they are paid. These include municipal or property taxes. It can be claimed on accrual basis and not payment basis.
Repair, maintenance charges
One can also claim tax benefits on repair and maintenance of the property. It is a fixed rebate that an individual can claim irrespective of the expenditures one has actually incurred. It is flat 30% and is allowed after the deduction of property tax for the fair rental value of the property.
A second home loan can bring definitive advantages to individual borrowers. Home loans have enabled dreams of home ownership within the reach of the common man. Various tax benefits have made it one of the most preferred options to fund home buying.
The writer is CEO, DHFL