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Tax benefits on second home
October, 13th 2008

Kumar purchased a two bedroom apartment for Rs 18 lakhs five years ago. He intends to purchase another apartment for Rs 20 lakhs. His monthly gross taxable income is roughly around Rs 75,000. He decides to rent out his second house.

What are the tax sops he is entitled to?

Kumar has found a lender who is willing to give him the huge loan amount. The loan amount for his first house is Rs 18 lakhs. For a loan tenure of 15 years and interest rate of 13 percent, his monthly EMI outflow comes to Rs 22,774 approximately . The loan amount for his second house is Rs 20 lakhs. For loan tenure of 20 years and interest rate of 13 percent, his monthly EMI outflow comes to Rs 23,430 approximately.

The EMI calculated by the lender depends upon the loan amount, interest rate charged for the loan and loan tenure. EMI is an uneven combination of the principal and interest components . During the initial years, lenders collect more interest than principal but as the tenure approaches the end, the principal component of the loan increases . In the beginning, a major portion of the EMI - as high as 90 percent - goes in servicing the debt.

Tax benefits that come with home loans are a major reason why many people eagerly join the bandwagon of homeowners. The principal repayment that borrowers make on their home loans is eligible for income tax deduction under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh in case of a selfoccupied property.

Self-occupied property

Kumar's taxable income is Rs 9 lakhs. The principal component of the EMI that he repays to the lender annually comes to around Rs 79,638. Kumar can deduct the home loan principal amount repaid from his taxable income directly.

Therefore, his taxable income becomes Rs 9 lakhs minus Rs 79,638 - i.e. Rs 8.20 lakhs. He can invest in other instruments mentioned under Section 80C and further reduce his taxable income by another Rs 20,000.

Homeowners can avail tax benefits on the interest component repaid under Section 24. Under Section 24 of the Income
Tax Act, the maximum amount of interest that can be deducted from your taxable income for a selfoccupied property is Rs 1.5 lakhs. As a result, your taxable income decreases by that amount.
Suppose Kumar has repaid Rs 1.9 lakhs towards the interest component of the existing home loan in one assessment year. Since there is a limit of Rs 1.5 lakhs, he can deduct this amount from his income.

Second property

For Kumar's second house, there are no benefits of principal deduction like in the self-occupied property. Homeowners can, however, claim benefits for interest repayments of the home loan. There is no limit on the interest repaid unlike the Rs 1.5 lakh limit under Section 24 for self-occupied property. The rental income earned by the second property has to be shown as taxable salary with upto 30 percent deduction on rental income allowed as deduction towards property tax and maintenance.

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