People purchase second homes or other secondary properties for a variety of purposes. It first strengthens the financial portfolio and then has the potential to generate passive revenue. But are you conscious of how buying or selling a second property will affect your taxes? We are available to address any queries you may have regarding capital gains tax on the selling of a second property, second property tax benefits, and second home loan tax benefits.

Benefits of Second Home Taxes

Only if you have taken out a house credit to purchase the property, are you eligible to receive tax benefits when you purchase a second home. If you own two homes, one is regarded as being self-occupied while the other is rented out. Rent from the leased property will be assessed under the title “Income from House Property” in accordance with the Income Tax Act. The self-occupied house will have zero annual worth. A notional leasing valuation of the property is added to taxable revenue if it is a “Deemed Let Out Property” (DLOP). However, the usual exclusion offers a 30% discount.

Tax Benefit for Second Mortgages

Let’s examine the financial advantages of second house loans:

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Section 80C Tax Deductions

The highest exemption an individual can claim for a house loan is Rs 1.5 lakh, as per Section 80C of the Income Tax Act of 1961. Additionally, a second house debt can be written off for up to Rs 1.5 lakh. Prior to 2020, it was not permitted; changes were made in the 2019–2020 budgetary budget. PPF, ELSS, EPF, NPS, and Fixed Income Schemes are covered by section 80C. Even if a property is self-occupied or rented, the tax advantage for second mortgages can be used.

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Tax Benefits for Payment of Interest

Second Home Tax Benefits

A house loan borrower may claim an advantage of up to Rs 2 lakh on interest payments under Section 24 of the Income Tax Act, 1961. Both the first house loan and the second home loan are eligible for a discount. One may deduct any amount from income tax if a domestic property is not used for self-occupation; there is no higher limit. Keep in mind that you cannot receive a refund for any fees paid to a broker to find a renter or for a commission made to obtain a credit.

If the second house is rented out while the first is your primary residence, you must report the rental revenue. You are allowed to claim the standard deduction during that period, which covers both the paid local taxes and the interest on the loan (up to the maximum allowed). 30% is the usual reduction. You can deduct up to Rs 2 lakh from other streams of income, and any excess loss is rolled over to the following assessment years.

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Tax Benefit for Second Mortgages

The Indian government amended the budget for the fiscal year 2019–20 to permit the self-occupation of two homes. As a consequence, borrowers of second homes can also claim tax advantages. Let’s examine the benefits of a second house credit in more detail:-

Note that the tax advantages listed above are computed per individual, not per property. Therefore, if it’s a joint house financing, there will be additional benefits. Tax advantages for second house loans are available to everyone.

Example of a Tax Benefit for Second Homes

Let’s look at an illustration to better grasp the second house tax benefits available in India.

One house is owned by Ms. Mukherjee, a businesswoman, in Gurgaon. She had gotten a loan from HDFC Bank to purchase a house. She makes EMI payments on her house debt each month. Now intends to relocate her company to Bangalore, though. She rents out her Gurgaon house and purchases a second property in Bangalore in order to pay the EMI. What now needs to be determined is whether she qualifies for a second property financing. Can she utilize the tax advantage for a second house loan?

Yes, Ms. Mukherjee qualifies for a second mortgage and a second mortgage tax credit. No matter whether it is leased out or used by the owner, up to Rs 1.5 lakh can be deducted under Section 80C.

Let’s learn more about the tax treatment of a second house loan using an illustration.

Assume Businessman Mr. Mukherjee, 38, has one home in Pune that he makes EMIs on. (Equated Monthly Instalments). In order to pursue greater career opportunities, he intends to move to Delhi. Mr. Mukherjee uses the rental income from his Pune property to pay the EMI. And he chooses to purchase a new house in Delhi rather than rent one.

Second Home Tax Benefits

• Is Mr. Mukherjee currently eligible for a second mortgage loan? Does he qualify for a tax refund for a second home?
• Mukherjee is eligible for a tax credit when taking out a second mortgage.
• To receive a tax benefit on your second debt, follow these steps:
• Section 80C: Section 80C allows you to deduct up to Rs. 1.5 lakh from the total sum. Several buildings qualify for this deduction, regardless of whether they are leased out or used for personal use.
• In accordance with clause 24(b), you may subtract interest payments up to a total of Rs. 2 lakhs.

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How to Claim a Second Home Loan Tax Benefit

Here is how to claim a second house loan tax benefit if you intend to purchase a second property:

Step 1: Ensure that the first and second mortgages are in your name in order to receive the tax advantages. You must be the owner or co-owner of the land if the loan is equally held.

Step 2: To save time, you must use a house loan tax benefit calculator to compute the tax advantages. You can determine the financial advantages of a home loan for free using many free websites.

Step 3: Submit a Home Loan Interest Certificate to your company to have the TDS computation changed. (Where you are currently employed). TDS will be deducted from your salary without any advantages if you neglect this procedure. Additionally, your workplace might require a Loan Sanction Letter from you.

Step 4: You can still claim tax advantages even if you fail to send the Home Loan Interest Certificate and Loan Sanction Letter.

Tax On Capital Gains When Selling Second Property

According to Section 54 of the Income Tax Act, selling domestic land is exempt. Only if capital profits are spent in the acquisition or building of the new property can any person or HUF who sells a property benefit. A capital gain is a benefit realized from the sale of a piece of real estate or other investment, such as bonds or securities. Keep in mind that only assets categorized as long-term capital assets are eligible for exclusions. When an object is older than 24 months, it is referred to as a long-term financial asset. A taxpayer must purchase a new domestic property within three years of the transfer date of the previous one.

Amount of Exemption under Section 54 of Income Tax Act

The amount of exemption under Section 54 of the Income Tax Act for long-term capital gains will be the lower of:

• Long-term capital gains from selling a residential property
• The balance from capital gains, if bought another property

Exemption on long-term capital gains is capped at Rs 10 crore from the financial year 2023-24.

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Let’s clarify using the following example:

For Rs 60,000, Mr. Sharma is selling his duplex in Noida. Using the financial profits, he goes on to purchase a second apartment for Rs. 40,00,000. Now, capital profits will be calculated in athe way described below:-

Second Home Tax Benefits

Tax exemption will be less on capital gains from selling a property (Rs 60,00,000) or the amount spent to purchase a new property in accordance with the aforementioned circumstances. The relief amount in this instance will be Rs 20,000,000.

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Second Home Tax Benefits: In conclusion

Your second residence may serve as a vacation house, an addition to your portfolio, or a source of passive revenue. But always keep in mind that even though a second home has financial ramifications, you shouldn’t let that worry you. There are a few financial advantages for second house loans, though. When selling or purchasing a second home, keep in mind the capital gains tax. Therefore, one must think about all financial implications before considering alternatives for a second home.

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