A Complete Guide on Tax Rebate on Second Home Loan

When it comes to financial milestones, buying a home for your family tops the list. Once you cross that goal, step two is buying a second home. Not because you might run out of space in your first home, but for the sake of investment.

Real estate could be one of the best places to put your money. When have you ever heard of property rates dipping? That means your money is buying you an asset that could be worth much more as the years go by. Additionally, a second home could also be used to generate rental income.

If you’re ready to buy a second home, you’d be glad to hear that the Reserve Bank of India RBI home loan guidelines in India encourages home loans, by making them more affordable and customer-friendly. RBI has increased LTV (Loan to Value ratio) from 80% to 90% for home loans below Rs. 30 lakh in India. You can read more about Reserve Bank of India home loans and RBI house loan interest rates here.

You don’t have to be super rich to buy a second home. Home loans make buying it a lot easier. Moreover, you also get the added benefit of a income tax rebate when you take a home loan.

If you’ve taken one before, you may know there are several deductions you can claim on it.

Income Tax Benefits for First Home Loan

Let’s assume you’ve bought your first home for personal use. When you’re living in the home you’ve purchased on loan, it is termed as self-occupied. This home loan is eligible for tax deduction under Section 80C and Section 24(b) of the Income Tax Act. To understand how much interest on housing loan is exempt from income tax, let’s first consider the two components of an EMI—Principal and Interest. The total amount of principal you pay in the Financial Year (1 April to 31 March) can be claimed as a deduction from your total income for that year. The maximum tax deduction allowed under Section 80C is Rs. 1.5 lakh. Additionally, you can also claim deductions up to Rs. 2 lakh of interest paid on the EMI under Section 24(b). You can consider both these deductions when filing for Income Tax.

However, when you buy a second house on loan, it is considered as a “let-out” property. The tax treatment for your second home loan changes.

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Tax Benefits for Second Home Loan

For the second home, only the interest payment is eligible for the deduction under Section 24(b) of the Income Tax Act. This means the interest you pay for tax benefits on second house loan is exempt to a limit of up to Rs. 2 lakh too. Taking a second house loan also saves tax while you build an asset. The income received by renting your second home could further help your finances.

To help you understand the benefits of taking a second home loan better, let’s consider a house loan tax benefit example.

Buying a Second Home without a Home Loan

Mr. Vipin Nair is a 35 year old IT professional and makes Rs. 24 lakh annually in India. He lives in Bangalore (Karnataka state) with his family in a home that he purchased on a home loan a few years ago. He recently finished paying the EMIs and now wants to buy another home in Bangalore itself, for investment purposes. However, this time he decides to pool together the money from his Fixed Deposit (FD) and retirement fund to buy the second home without a home loan. At the end of it, all he has is a new home and the rent he gets from it. He has used up all his savings for a new home.

Buying a Second Home with a Home Loan

On the other hand, Mr. Anand Shetty is a 37 year old banker and makes Rs. 30 lakh annually. He lives in Mumbai (Maharashtra state) in a home that he purchased on home loan too. After finishing paying his EMIs, he decides to buy a second home as an investment. However, instead of counting on his own resources, he takes a home loan for his second home too. Mr. Anand Shetty now has to pay monthly EMIs for his new loan, but he can avail the tax rebate under Section 24(b). This interest on housing loan is exempt from Income Tax. When he takes the home loan, his FDs (fixed deposits) and retirement funds stay intact too. Additionally, he continues to earn rent on his other house.

Conclusion

As you see, there’s more to gain when you buy your second home on loan too. Now we also know that the RBI home loan guidelines is also in favour of home loan borrower. A Borrower who is taking loan for his second house will get the tax benefits as per income tax section 24(b) of India. It gives you the privilege of buying a worthwhile asset without hurting your savings. It also plays a big role in reducing your Income Tax liability.

Thus there is no confusion about tax rebate on second home loan. If you are planning to apply for second home loan, you may process and get the tax benefits as per Income tax act of India and RBI loan guidelines.