Looking for income tax saving opportunity? Do you have a plan to buy second home? Then you might have aware about the income tax exemption rule on 2nd housing loan or you can say 2nd home purchase. But do you know that the rule has been changed recently after budget 2017? In this article I will explain you about the new restrictions of Rs 2 lakh on tax benefit on second house, which was earlier no limit.
Previous rules of tax benefit on second home loan / 2nd home loan
So far, people have enjoyed a no limit income tax exemption on their 2nd home purchase as the entire interest rate can be tax exempted and one have saved huge taxes so far. In fact many people wanted to utilize this section to save taxes, thus purchased high value property to save income tax. many people have even went for luxury properties.
But after budget 2017, when the new finance bill 2017 has been proposed, it has clearly mentioned that the tax benefit will be limited up to Rs 2 lakh only, similar to the section 24 for first time home loan seekers.
What is Section 71 – 3A of Income Tax Act in India
Now this new section 71-3A is specially introduced in our income tax act to handle this clause for 2nd home purchase and make the tax exemption benefit up to Rs 2 lakh only.
Let’s have an example. If Mr X took a home loan of 50 lakh and enjoying an tax free interest on housing loan of say 6 lakh every year, then now onward he can only declare up to 2 lakh. That means for the additional 4 lakh interest he will not be able to save taxes. That means his taxable income will increase by 4 lakh compared to last year, considering the income / salary is same like last year.
How many types of scenario can be possible here?
Generally when we buy 2nd home to enjoy this benefit, we may face 3 types home loan takers. Let’s explore them one by one.
- Bought the flat and also staying on the same, declaring as self occupied.
- Bought flat for investment purpose and rented out the same to enjoy rental income.
- Bought flat and left to other city or same city keeping it empty. This case will considered as Notional rent under income tax act.
How to claim tax benefit on 2nd Home Loan?
So, if we consider the previous 3 cases the answer will be as follows
- As the first property is self-occupied you will get the default 2 lakh tax exemption benefit without making the calculation much complex.
- In case the loan interest is less, but the rental income is high then one can get 100% exemption. On the other hand, if the rent is less, home loan interest is high then up to Rs 2 lakh limit. In both the case the set-off amount will be considered. E.g. Rent is 1 lakh and home loan interest is 5 lakh, then till last year one can claim up to 5 – 1 lakh = 4 lakh as negative amount set off from taxable income. But from now, it will be only up to 2 lakh under new section 71 3A of income tax act.
- In the forth case generally one can claim loss from property. This loss from property is also exempted up to Rs 2 lakh limit only. In case of any balance loss, will be carried forward to be set off against house property income of subsequent 8 years.
There might be various other scenario or cases prepared to find out. But these are very common scenarios which many of us might face due to this changes in budget 2017. Do you think this is a welcome change? How this change will impact your tax saving on home buying plan for the 2nd time? You can write a comment below and share your experience or any query.
Note: This information is shared as per my knowledge and understanding, professionally I am not a CA. There might be various complex scenarios and you may need some assistance. In such case, you should always consult with a tax expert like CA. Consider this article as information purpose only, for more detailed knowledge you should always refer to taxman website. Thanks for the understanding, if you find my efforts useful kindly share this article on Facebook.