Should I apply for a Second Home Loan? Will I get tax benefits?

Since March 2020 the housing industry has seen a decent rise. After all, Home Loan Interest Rates are lowest ever in the last decade. Due to prolonged work from home and movement restrictions, urban as well as semi urban areas have seen a spike in booking for ready to move in homes. From first time home buyers to those who are looking for additional residential space near their office, or home town or for that matter investors, who are in search for rental opportunities are all out there scouting for affordable housing finance deals.

If you too are planning to buy a second house and finance it with any of the leading lenders such as HDFC Home Loan, you should certainly go ahead and make the most of the available opportunity. A word of caution though- do list the pros and cons of buying a second home along with your ongoing home loan. As you are already living in your home, the second home purchase should not be an impulsive or speculative investment.

Here in this article we will share queries related to tax benefits on second home loan.

Will I be eligible for tax rebate on my second home loan when I am already servicing a home loan?

Legally, there is no capping on how many homes you can buy and how many home loans you may apply for. And there is no restriction on the number of properties for which tax benefits can be availed of. 

The property ownership will be referred as Self-Occupied Property (SOP) or Let-Out Property in the ITR. As the name suggests, self occupied or SOP is the property that is purchased for self use or residing purpose. Let Out Property is the one that is bought for renting out or letting-out. For self-occupied properties, gross annual income is considered as NIL as per Section 23. 

As per Union Budget 2019, you can now consider the second house as self-occupied. The overall interest repayment benefit on both home loans cannot be more than Rs 2 lakh in a financial year.

For let out properties, or more than two self-occupied properties, full interest paid can be claimed as deduction. Also, you are required to offer notional income for more than 2 houses. The loss under the house property income is also capped up to Rs 2 lakh. The interest over this amount shall be carried forward for 8 successive years. It is adjusted against income from house property. Likewise, deduction under Section 80 C for repayment of home loan principal is restricted up to Rs. 1.50 lakh.

Let’s consider two cases to understand this-

A) First home is self-occupied, and second home is left vacant 

Even though you are not using the second property for residence purposes, it cannot be considered as a let out unit. There is no rental income involved. You can mention both properties as self-occupied. Total available deduction on interest repayment will be up to Rs 2 lakh.

  1. B) First home is self-occupied and the second home is rented out.

When a property is meant for let out, its gross annual value will be considered as rental value. However, the rental value should be more than or equal to a reasonable amount of rent as guided by the local municipality. The declared rental income from the second property needs to be added in the gross income. From total income, deduct the standard deduction of 30 per cent, interest on the loan and the municipal taxes paid. 

Hope this information helps you on your queries related to tax benefits applicable on a second home loan.

Making an informed decision
Furthermore, keep following things in my mind when apply for a second home loan:

1. FOIR: Amid COVID uncertainties it is important that your overall fixed repayments are below 40% of net take home income. You should not accumulate too much debt or compromise with your entire liquidity.

  1. Good financial health: It is most important to ensure that you fulfil your essential personal finance goals before applying for a fresh loan. Make sure you have adequate insurance for life & health, enough emergency funds for 6 months’ expenses and keep your investments intact for other essential life goals such as kid’s education etc. 
  2. Credit Score: The EMI load should be well assessed before applying for a loan. A default or repayment irregularities can hurt your credit score. Thus opt for low EMI. You can always prepay loan and lower interest cost gradually during the loan term. There is no foreclosure charge on floating home loans.
  3. Make an informed decision: Look for lowest rate, ease of application and excellent post disbursal services. Use professional advice and compare the best home loans online. You can use a loan comparison website and speak to the loan professionals free of cost. Applying through a loan aggregator website makes the entire process of home loan application a cakewalk. They will help you with documentation, eligibility and guide till the end, without any charge.

All in all, when you make an informed decision, a second home purchase will certainly be a rewarding experience. 

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