Buy A Second Home And Save Taxes

Buying a second home is catching up as a trend in the Indian Real Estate Market. Not only is a second home a great asset, but it's also a convenient option for families with individuals who like their own space every now and then. But buying a second home comes with its own financial considerations. Firstly, you need to make sure why is it that you want a second home— personal use or investment purpose. Then, you should decide accordingly whether you need to take a home loan.

To start with, let us analyze the ways in which you can reduce the tax burden with the help of a second home.

Under section 80C of the Income Tax Act, if home loan is taken for a self-occupied property, the principal amount repaid up to Rs. 1.5 lakh is eligible for tax deduction. Also, interest payment up to Rs. 2.0 lacs is tax deductible under section 24. However, if the loan is taken for the purchase of a second home, only the interest payment is eligible for deduction and no benefit is available on the principal repayment of the second loan. At the same time, if the second home is given out on rent, there is no limit on the deduction of interest payment which can save you taxes.

Let us take an example to understand the tax benefits from a second home that is let out on rent. Suppose the rental earnings from the second home after adjusting municipal taxes is Rs. 1.5 lakh annually. So, the annual value of the property is Rs. 1.5 lakh. A standard deduction of 30% is allowed on the let out property which comes to be Rs. 45,000. Now, suppose the interest on loan taken for this second house is Rs. 1.4 lakh per year.

The total income from house property will be calculated as:

1,50,000- (45,000 +1,40,000) = – 35,000

This negative amount is shown as a loss from house property and the owner can reduce this amount from his taxable income or claim tax benefits on this amount while filing tax returns.

However, if you have a second home and it is lying vacant, you will still have to pay the rental value. The deemed income will be added to your taxable income. The second home also adds to your net worth as its value appreciates with time. If this second home is yet to be constructed, then for five years from the time of construction, the amount of interest paid during the pre-construction period will be used for tax deduction. When you have several homes, you have to choose one home as the home for living for the purpose of tax calculation. So even if you rent that house, the income from it will be considered nil. In order to avail the highest benefit, you should choose the house with highest loan as non-exempt.

However, you should be cautious with the purchase of a second home. It doesn't always bring benefits as far as taxation is concerned. You won't be making any savings if you have paid the home loan and there is no interest to be paid on the second loan. Also, if the interest paid and standard deduction is less than the annual value, you do not get any tax benefit. Another point to be noted is that the second house is treated as 'wealth' for tax purposes. And 1% wealth tax is levied if the net wealth exceeds Rs. 30 lakh.

Thus, to maximize your savings, you should consider all the pros and cons and make a smart decision.

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