The wealth distribution in India is such that the rich are getting richer each day and poor are struggling to make ends meet. Everyone dreams of owning a house. Many people cannot afford a house, and opt for a home loan. Home loans facilitate aspiring home owners realize the dream of owning a house. Home loans come with tax benefits under Section 80C and Section 24 of the Income Tax Act.
As per studies and research, buying a second house is easier than buying the first. When buying the second house, you will be financially independent. To add to that, the Government offers attractive tax benefits on owning second house by availing home loan.
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Many people buy a second house to rent out and consider this a long term investment. Some people buy a second house as a holiday home or to spend weekends. In big cities like Mumbai, Delhi and Bangalore, the real estate market is booming which makes builders and prospective buyers engage in fierce bidding wars in popular localities closer to the city.
Interest On Home Loan: Interest paid on home loans is allowed for tax deduction as per Section 24 of the Income Tax Act. The tax benefits on interest paid towards home loan for a self occupied property is capped at Rs 2 Lakh per assessment year, while the entire amount paid towards interest is allowed for tax deductions in case the property is let out.
Home Loan Principal: You are eligible for a tax deduction on the principal repayment of home loan under Section 80C of the Income Tax Act, up to Rs 1.5 Lakhs a year. However, Section 80C also covers NSC, PPF, Tax Saving FDs, ELSS and so on.
For the purpose of taxation, the IT Act has sorted the income received by individuals into five different heads. One of them is income from house property. If an individual has let out a housing property, then the rent received is taxable. The actual rent received is referred to as annual value. If the assessee uses this property for a commercial purpose, then it will not be taxed under income from a housing property.
SEE ALSO: How To Avail Tax Benefits On Home Loan?
You can claim both HRA and deduction on home loan interest, subject to certain conditions mentioned below:
The Assessee Owns A House In A Different City: Imagine this: you have bought a house in Mysore, but you get a job offer in Bangalore and you move there. Since you cannot live in your house in Mysore as you are working in Bangalore, you are eligible to receive HRA in Bangalore if you stay in a rented house and claim tax deductions for the house purchased in Mysore through a home loan.
When The House Is Still Being Constructed: If you are constructing a house with home loan and currently staying in a rented house, then you can claim both HRA and tax deductions on interest paid on home loan. You can receive HRA till the date of completion of the construction of the house.
You Own A House But Not Able To Live In: Imagine this, you have a house in the outskirts of South Bangalore and your work location is changed to somewhere in the outskirts of North Bangalore. In the scenario, you rent a house somewhere near to your work location for a hassle free commute to work. You can claim HRA for the rented house and tax deductions on the interest paid on home loan.
The Income Tax Act, enacted in 1961, states that if an individual owns multiple houses, then only one of those would be considered self occupied while the rest be considered let out for rent or lease and these individuals must pay tax on the fair rental value of the property. The fair rental value is calculated as the expected rent from similar properties in the neighborhood.
The property owner has the right to choose the self occupied property and this can be changed in each assessment year. A major tax implication is that if the self occupied house was purchased or constructed with a home loan, then the owner is eligible for a tax deduction of Rs 2 Lakhs a year on the interest paid towards home loan under Section 24.
The pre-construction interest paid up to Rs 2 Lakhs a year on home loans are tax deductible, in case the property is self occupied. The tax benefit can be availed only after construction is complete. If the property is jointly owned, then individual(s) actually paying home loan EMIs are allowed tax deductions on interest.
The remaining properties are taxed as per the higher amount between rent obtained and the fair rental value, regardless of the property being self occupied by relatives of the owner or let out for lease or rent. The property owner can claim municipal tax paid as a deduction. If other properties are purchased with home loans, then the interest paid can be claimed for tax deductions with no capping.
SEE ALSO: Tax Benefit For Home Loan
If the second property or any subsequent properties are rented out for commercial purposes, then the taxation gets complicated and this depends on a case to case basis. If the rental income from the property cannot be excluded from other asset income, then the whole property would be taxed under income from other sources or as profits and gains from a business.
If the rental income received from the property is distinguishable from the income from other assets under the property, then the property would be taxed normally on the actual rent paid. You must make sure that you know taxability in light of the different criteria.
Although, you may avail home loans for more than a single property, the total deduction under Section 80C is restricted to Rs 1.5 lakhs, for repayment of the principal amount of all the home loans taken together.
Claimable Deductions: Following tax deductions can be claimed on two or more properties:
Standard Deduction: 30% of the annual value of the house is offered as flat deduction for expenses on home insurance, repairs and maintenance. The best thing about this is that these deductions can be claimed without having to prove said expenses.
Deductions on Municipal Taxes: Municipal taxes paid on a property are allowed for tax deductions.
Housing Loan Interest: Interest paid towards home loans are allowed for tax deductions as mentioned earlier in the article.
As per the new provision, for those having to maintain families at two different locations due to employment, children's education, care of parents and so on, Section 23(4) was proposed and will be in effect from Financial Year 2019-20. As per this provision, an assessee owning more than two houses can claim the annual value of any two houses as nil. It shall be Rs 2 lakhs for both the properties taken together.
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