Taking a home loan to buy a house has many benefits in terms of making a good investment, securing your future and availing a plethora of tax exemptions that are being offered by the IT department. But added to all these benefits is that fact that you can take a second home loan and make even more tax savings on it. The trend of having a second home through another home loan is fast catching up with the majority of young professionals in India who have some extra spare able money. Lets us find out what are the benefits of taking a second home loan?
The Basic Deductions
If some one has taken the first house through the home loan route then he gets a tax exemption of Rs. 100000 towards the interest paid under Section 80C and exemption on the interest paid up to Rs. 150000 under Section 24 of the IT Act.
Now if the same person takes another home loan and pays the EMI he shall be eligible for exemption only on the interest element paid. But the good news is that there is limit on of Rs. 150000 as interest paid which can be claimed for exemption. Thus while the exemptions are limited to Rs. 100000 + Rs. 150000 =Rs. 250000 in the first home loan, one can get greater exemption through the second home loan in case the interest paid annually exceeds Rs. 250000.
Even while the second house is under construction 20% of the interest paid during the period that it is under construction eligible for tax exemption.
Adjustment of Income from Property
When one has two houses it shall be considered as one being self occupied and the other being rented out. In most cases the first house is the one that is taken to self occupied unless the owner has moved out to another city.
Now the income on the rent from the second house is taxable but there are provisions to adjust a major portion of this income out of the taxable income. 30% of the annual rental income (after deducting all the municipal taxes paid for the property) that is decided by the local civic authorities of the place is deducted from as cost of maintenance of the house. Thereafter the interest element on the loan repayment is deducted and income if any remaining is to be considered for the purpose of taxation. Normally in the initial years of the loan the interest element exceeds the left over 70% of the rental income thus letting the owner enjoy tax exemption on the balance of the interest being paid.
Illustration
Let us consider the above situation for calculation purposes where the first house is self occupied and the second one is rented out.
| 1st Home | 2nd Home | |
| Rental Income after municipal taxes per annum | 0 | Rs.1, 67,000 |
| Standard deduction @ 30% | 0 | Rs.50000 |
| Interest Paid on the Home Loan | 80,000 | Rs.125000 |
| Income from Property | Rs.-80000 | Rs.-8100 |
| Total Interest Exemption Possible | Rs.-88100 | |
Thus in this case the owner shall avail a total tax exemption of Rs. 88100 towards the interest paid for both home loans while availing up to Rs. 100000 on the principal element paid for the first home loan only.