Many of us decide to purchase a second home for investment purposes. You can either build it for self occupation or rent it out, depending on what you need.
A second Home Loan is an attractive option, especially if you consider the Home Loan tax benefits that you can derive under the Income Tax Act, 1961. You can receive tax deductions on the interest that you pay for your second Home Loan.
This deduction is up to a limit of Rs.2 lakh, if the construction of the property is completed within three years. If construction is not finished within this time, then the limit gets reduced to Rs.30,000.
Here are few other points you can keep in mind if you are intending to borrow a second Home Loan:
When you opt for a Home Construction Loan or Home Expansion Loan, you are required to determine beforehand if you would be using it for self-occupation or you will be renting it out.
When you have two constructed properties on your name, the law considers one property as self-occupied and the other as the rented property, even if you have not let it out. The discretion would be yours.
Once you have determined which property is which, you can claim deduction on your under-construction property under the Income Tax Act, in sections 80C or 24, 1961 (“The 1961 Act”).
In case the house is vacant, it is considered as Deemed to be Let Out Property, on which a notional rental value is levied under the 1961 Act, and for maintenance charges and repair of the vacant house, you can claim a flat deduction of up to 30% on the gross rental value.
If you’re taking out a second Home Loan, the interest payable on it can attract tax deductions under the 1962 Act. Also, in case of a second property, only the interest is subject to taxable deductions unlike your first property, where you can claim benefit on the interest rate for up to Rs. 2 lakh, which can reduce to Rs. 30,000, in case the under-construction property is not completed within 3 years from the claim.
However, in a second Home Loan, the deduction is applicable only to the interest and not on the principal amount as is allowed for your first property in Section 80C of the 1961 Act.
The good part is that there is no upper limit on the claim that you can apply for, on the interest on the second Home Loan as per Section 24(b) of the 1961 Act.
If your property is not yet constructed, you can claim a tax benefit of up to 20% on the amount you have paid totally as a pre-construction interest.
You are also eligible for a Wealth Tax @1 percent of the total value under the 1961 Act, if the gross value of the property exceeds Rs.30 Lakh in a given financial year.
Therefore, borrowing a second Home Loan can be really beneficial for you under the 1961 Act, if you can adhere to the above mentioned points. You can avail Home Loan tax benefits by investing in your second home. Another aspect is that a second home can be a good source of income through rent, so there’s another source that you can have to keep your financials stable and secure.
Watch the video below how to effectively manage your Home Loan in a smart way:
Aman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management.