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Are the tax liabilities of buying a second home different from the first?

The tax liabilities of buying a second house property can be split into two periods – one before and the other after the Interim Budget 2019. Here’s a closer look at how the taxation of a second home has changed recently.

Before the Interim Budget 2019
The provisions existing before the interim budget 2019 were applicable up to FY 2018-19. Below are the main points of interest regarding taxation of a second house property till the said financial year:

  • If both your homes were not rented out, the first one was considered as a self-occupied property, while the second one was deemed to be let out. The notional rent on the second house property was taxable under the head “income from house property,” even if the house was not actually rented out.
  • If you lived in one of the house properties and rented out the other, the rent received for the second house would be taxed as rental income.

The Interim Budget 2019
This budget recognised the possibility that current socio-economic conditions may require an individual to own and maintain two house properties. So, the provisions regarding taxation of a second home have been amended to provide relief to the taxpayer. The new provisions shall be effective from FY 2019-20. Here’s how the law now views the second house property owned by an individual.

  • If you own two properties and neither of them is rented out, then both the homes shall be considered as self-occupied properties. This way, you do not need to consider the second property as deemed to be let out, and you don’t need to pay taxes on notional rental income. Effectively, this brings down the income chargeable under the head house property, so your tax liability is minimised.
  • If you live in your first home and rent out the second one, you’ll be required to pay taxes on the rent received.

Tax benefits on housing loans
Below are the tax benefits available on a housing loan taken for your first home.

  • The principal component of the EMI paid for the year can be claimed as a deduction from total taxable income as per section 80C of the Income Tax Act, 1961. The maximum amount of deduction allowed is ₹1.5 lakhs. A condition applies - the house property should not be sold within 5 years of possession. If it is, the deduction claimed will be added to income in the year of sale.
  • As per section 24, the interest on housing loan taken for purchasing or constructing your first house can be claimed as a deduction from house property income up to ₹2 lakhs.

On the other hand, if you’ve taken a housing loan for purchasing your second home, the principal component is not eligible for deduction. The interest on housing loan for the second property can be claimed as a deduction up to ₹2 lakhs.

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