Are you planning to buy a second home and also applying for home loan to buy this property. You may buy second home for an investment, to have regular rental income or to have a home in other city. However, It is important for you to understand the income tax calculation for owning a second home.

The formula for income by your home is as follows:

home loan tax benefits

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. 1.5 lakh and interest up-to a limit of Rs. 2.0 lakh.

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

income tax rebate on second home will be as follows:

Full interest on home loan is allowed as deduction for the let out property – so there is no limit of Rs. 2.0 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. 1.5 lakh).

Taxability under different scenarios

1. Lets take a simple example – One house is rented out, another used for residence. Rental income received from the rent-out property is taxable and interest paid on a home loan taken for such a property is fully deducted (without the Rs. 2-lakh Limit) against such income. The other property, being self-occupied, will have NIL income, but interest deduction on the corresponding home loan, if any, is limited to Rs.2 lakh.

2. If Both houses are rented out. In this case, the respective rental income from the two properties will be taxable and a full deduction of interest paid on the corresponding home loans will be allowed against such incomes.

3. None of the houses is rented out Since the law allows only one house to be considered as self-occupied, the second house is considered ‘deemed rented out’ for the year under consideration and the fair market value of rentals will be considered taxable in respect of such house. The property to be classified as deemed rented out is at the individual’s discretion.

In case of joint ownership and/or home loans taken in joint names, rental income may be computed and deductions for interest/principal repayments may be availed corresponding to the percentage share of each co-owner.

It is important to note that although the deduction on account of principal repayments is capped at R1.5 lakh under Section 80C, the interest portion paid on ‘rented out’ or ‘deemed rented out’ properties is allowed without any cap. Further, any loss computed under the head ‘House Property’ is allowed to be set off against your taxable income.

Also, a second house will be considered as ‘wealth’ on which wealth tax will be levied at 1% of value if the net wealth exceeds R30 lakh.

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