Investing in real estate is an good idea as it will provide best returns to you, Now if you already own a home and paying loan on it and planning to buy another Home on loan but confused regarding the tax implication then here is a guide for you.
Well you can of course get an second home loan till bank feels you can pay there loan on time. Now we all know that we get deduction 1.5 Lakh on interest paid on loan, but very few of you know that this is only allowed on self-occupied house.
If you buy another house then law will see it as let-out house, no matter its vacant or you are using it. As per law you can use only 1 house at a time as self occupied, Now here comes a benefit for you, As 1.5 Lakh interest deduction is allowed for self-occupied house as another house is treated as let-out so you wont get any cap on deduction. Which means you can get deduction on the full amount you pay as interest for the let out property.
If you let out your second property and receive rent then you have to pay tax on the actual rent received but if don’t rent out the second property then you will need to pay interest on Notional Rent, Notional Rent is the rent you will get is when you let out your house, and you have to pay tax on this amount. You can change your choice as to keep which house as self-occupied or let out from year to year.
You need to pay tax on the income you get from let-out house, it doesn’t matter second house is getting rent for you or not. So it clearly depends on you to which house you wanna declare as self-occupied or as let-out.
Benefits Of Second Home Loan :-
- There will be no limit on the deduction of interest on second home loan, as on 1 home loan you have 1.5 lakh limit.
- You can select any house to declare it as let out and any as self occupied,
- You can change house from year to year to declare them let-out or self-occupied,
- If you get loss from your house property then you can set off it from other incomes of yours.
Disadvantage Of Second Home Loan:-
- Deduction limit of 1 lakh on principle amount will be for both loan not for each loan,
- One house will be treated as let out even you are using it for your own purpose,
- You have to calculate the Annual value of both the house separately,
- You have to pay tax on Notional amount
Before moving ahead it is advisable for you to read : How To Calculate Gross/ Net Annual Value Of House Property? as it will help you understand the below example easily.
Lets take 2 examples to understand – which house you should self occupy and which one you should let out to get the maximum tax benefits on the loan interest amount:-
Suppose you are having 2 house and you had taken home loan on both houses and you have taken 1st house as self-occupied then following will happen :-
|Deduction of 30%||0||60,000|
|Income From House Property||-1,00,000||-10,000|
As the first house is self occupied then its annual value will be nil and therefore you can avail deduction on it. So in this case you will get total deduction of Rs1,10,000.
Now let us take another example in which 2 house is self-occupied :-
|Deduction of 30%||45,000||0|
|Income From House Property||15,000||-1,50,000|
So in this case you can avail deduction of Rs.1,45,000/-
So the final decision is on you, which you you wanna declare as Self-Occupied or let-out.