Sanjeev Arora, a marketing executive with an CAR company, took a Rs 10 lakh loan for 15 years to
buy a house in Maneser, Haryana. Currently, he is paying an EMI of around Rs 10,750. However, a year later,
Arora switched jobs and shifted to Ahmedabad.
Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years,
for which the EMI is about Rs 20,650. “I could have sold the house at Maneser to fund the second
purchase, but didn’t do so because I’m sure the value of the property will appreciate in a couple of years
,” says Arora. Instead, he has leased the first house at an annual rent of Rs 120,000.
Now what Income Tax States on Exemption on interest
In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh
qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under
However, in case of a home loan for the second property, only interest payment is eligible for deduction.
No tax benefit is available on the principal repayment on the second loan. However, the good part is that
there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house).
A property owner can avail of tax benefits on the interest paid on multiple home loans.
In case the house is yet to be constructed, 20% of the total interest paid during the preconstruction
period is also allowed as tax deduction. This is available for five years from the time the construction
is complete till you get possession.
Deductions allowed on income from second home
Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value.
The notional or deemed income (see How income is computed) will be added to your taxable income.
After deducting such expenses from the income that you earn from the property, if you incur a loss,
you have the option to set it off by expenses you bear.
If you own several houses, you can choose one as your primary residence. The income from this property
will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this
house that the limit of Rs 1.5 lakh applies for deduction on loan interest.
The entire interest on the loan taken for the other house, the income from which is taxable, can be
deducted from your income. This applies to any number of nonexempt houses that you may own.
So, to maximise your savings, consider the house with the highest loan as the non-exempt one. However,
make sure that the interest payment on this loan is higher than the principal-cum-interest payment
on the other loan.
Additionally, if you give your second house on rent for more than 300 days in a year, it will not
be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.
If any of the houses is sold after three years, the profit will be taxable as long-term
capital gains. However, there are beneficial provisions under which this gain is exempt from tax.
So if you invest the money to construct a house within three years or buy another house within two years,
your income will be tax-exempt.
However, the exemption is reversed and the amount taxed as capital gain if the new property is sold
within three years of being constructed/purchased.This will be considered a short-term gain and taxed according to your slab rates. You can also save tax if you invest the profit in a special bank account under the capital gain account scheme.
A similar exemption is available for investments of up to Rs 50 lakh in bonds, which are redeemable
after three years. This investment should be made within six months of the sale.