Many people often confuse the tax benefits on a second home but let’s clear everything here:)
Before understanding the tax benefits, it’s really important to understand what qualifies as a second home under Indian tax laws.
A second home is any extra property you own besides your main house. It can be a house, apartment, or villa, and you can use it for personal use, rent it out, or keep it empty.
Investment Opportunity: Real estate has always been an attractive investment.
Rental Income: A second home can provide a steady flow of rental income.
Retirement Home: Many people buy a second home as a retirement residence or a vacation spot.
Wealth Accumulation: Over time, property value appreciates, leading to significant wealth accumulation.
Owning a second home comes with several tax benefits under Indian tax laws. However, the benefits differ slightly from those applicable to your first home. Let’s break down the key tax benefits.
Under Section 24(b) of the Income Tax Act, you can claim a deduction on the interest paid on a home loan for your second home. The key points are:
Interest Deduction: You can claim a deduction for the entire interest paid on the home loan for your second home, without any upper limit.
Annual Value Consideration: If your second home is rented, the entire interest paid is deductible. However, if the property is vacant or occupied by you, a notional rent is assumed as income, and interest deduction can be claimed against that.
Carry Forward of Loss: If the interest deduction results in a loss (i.e., if the interest paid exceeds the rental income or notional rent), you can carry forward this loss for up to 8 years to set off against future income.
Example: If you’ve taken a home loan of ₹50 lakhs for your second home at an interest rate of 7% per annum, the annual interest payment would be ₹3.5 lakhs. You can claim this entire amount as a deduction under Section 24(b).
Important: Under Section 24(b), you can get a tax deduction for both properties you live in and those you rent out. However, the way income from these properties is treated for tax purposes is different.
The principal repayment on your home loan for a second home also qualifies for a tax deduction under Section 80C of the Income Tax Act.
Deduction Limit: The principal repayment qualifies for a deduction under Section 80C, up to a limit of ₹1.5 lakhs per annum. This limit is shared with other investments like PPF, NSC, ELSS, etc.
Conditions Apply: To claim this deduction, the property should not be sold within 5 years from the end of the financial year in which you took possession. If sold within 5 years, the deduction claimed earlier will be added back to your income in the year of sale.
Example: If you repay ₹2 lakhs towards the principal of your home loan for a second home, you can claim up to ₹1.5 lakhs as a deduction under Section 80C.
Important: The deduction under Section 80C is subject to the overall limit of ₹1.5 lakhs, which includes other eligible investments and expenses.
In addition to the principal repayment, you can also claim a deduction for stamp duty and registration charges under Section 80C.
Deduction Limit: The deduction is a part of the overall limit of ₹1.5 lakhs under Section 80C.
One-Time Deduction: This deduction can be claimed in the year in which these expenses are incurred.
Important: Since the overall limit under Section 80C is ₹1.5 lakhs, it’s essential to plan your investments and deductions accordingly.
If you decide to rent out your second home, the rental income is taxable under the heading ‘Income from House Property.’
Gross Annual Value (GAV): This is the higher of the actual rent received or the notional rent that the property could fetch.
Deductions from GAV: From the GAV, you can deduct:
Standard Deduction: 30% of GAV is allowed as a standard deduction for repairs and maintenance, irrespective of the actual expenditure.
Municipal Taxes: Any taxes paid to the local authority can be deducted.
Interest on Home Loan: As mentioned earlier, the entire interest paid on the home loan can be deducted from the rental income.
Example: If the actual rent received from your second home is ₹4 lakhs per annum, and the interest on the home loan is ₹3.5 lakhs, you will pay tax on the remaining ₹50,000 after deductions.
Previously, owning a second home attracted wealth tax if the total net wealth exceeded ₹30 lakhs. However, wealth tax was abolished from the financial year 2015-16 onwards. Now, there is no wealth tax on owning multiple homes.
Important: Even though wealth tax has been removed, owning multiple properties can still have other tax effects, like paying taxes on potential rent from empty properties.
Selling a second home also has tax implications, primarily concerning capital gains tax.
If you sell your second home within 2 years of purchase, the profit earned is treated as short-term capital gain (STCG) and is added to your income for that year.
Tax Rate: STCG is taxed at your applicable income tax slab rate.
No Exemptions: STCG doesn’t qualify for any exemptions under Sections 54, 54EC, or 54F.
If you sell your second home after 2 years of purchase, the profit is treated as long-term capital gain (LTCG).
Tax Rate: The gains are taxed at a flat rate of 20% with indexation (adjusting the purchase price to account for inflation) (If sold before 23rd July, 2024). 12.5% without indexation (If sold on or after 23rd July, 2024).
Exemptions: You can claim exemptions under Sections 54, 54EC, or 54F by reinvesting the proceeds into another residential property or specified bonds.
| Tax Benefit | Details | Section of IT Act | Maximum Deduction/Exemption |
|---|---|---|---|
| Interest on Home Loan | Deduction on interest paid on the home loan for the second home | Section 24(b) | No upper limit |
| Principal Repayment | Deduction on principal repayment of the home loan | Section 80C | ₹1.5 lakhs (shared with other 80C deductions) |
| Stamp Duty & Registration Charges | Deduction on stamp duty and registration charges | Section 80C | ₹1.5 lakhs (shared with other 80C deductions) |
| Taxation of Rental Income | Income from renting out the second home taxed under 'Income from House Property' | Section 22 to 27 | As per applicable tax slab |
| Wealth Tax | Abolished from FY 2015-16 | N/A | N/A |
| Short-Term Capital Gains (STCG) | Gain from selling a second home within 2 years, taxed as per the income tax slab | Section 45 | As per applicable tax slab |
Having a second home offers many tax benefits. To get the most out of these benefits, you need to understand the tax rules. This includes knowing about deductions for home loan interest, principal repayments, and how rental income is taxed. Understanding these rules helps you make better financial decisions.
Yes, you can claim tax benefits on the interest paid under Section 24(b) and the principal repayment under Section 80C.
Yes, the rental income from your second home is taxable under the heading ‘Income from House Property.’
If you sell your second home within 2 years, the gain is treated as short-term capital gain (STCG) and is taxed according to your income tax slab.
Yes, you can claim deductions on stamp duty and registration charges under Section 80C, within the overall limit of ₹1.5 lakhs.
Wealth tax has been abolished from FY 2015-16 onwards, so there are no wealth tax implications for owning a second home.
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