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2nd Home Loan Tax

What are the tax benefits that you can get if you have 2 housing loans?

With a steady rise in income and a strengthening of the economy and real estate market, most people are looking to purchase a property. Initial purchases were of primary homes, to be used for residential purpose, however the wealthier are now looking at 2nd and 3rd home for the purpose of investments or vacations or weekend getaways or even as retirement plans.

An investment in a residential property is one of the best ways to save tax as well as to grow your wealth currently.

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Investments in real estate can provide you triple benefits:

        > Capital Appreciation

                      > Tax Deductions

                                     > Rental Income

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But does buying a 2nd residential property provide you any tax benefits?
Over the previous decade, most property investors reaped rich dividends by making property investments, to the extent of an appreciation of 25% IRR and more. The icing on the cake has been that apart from the capital gains, the investors also received income tax benefits on the borrowed capital used to purchase the residential property.

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Tax Benefit on 1st House

First let us have a look at the tax benefits available on your primary (first) residential property that you may have purchased borrowing capital in terms of a housing loan.

Let us assume Mr. Menon is a salaried employee in a technology consulting company with an annual salary of Rs 24,0,0000 (Rupees Twenty Four Laks). Post his training he has settled down in his organization in Mumbai and he decided to purchase a ready residential apartment in Mumbai, rather than staying on rent and having the trouble of shifting out every 11 months.

After scanning through numerous apartments, he finalized on a 2 BHK apartment costing Rs 1,10,00,000 (Rupees One Crore Ten Laks) in Malad. He took a housing loan from a bank for Rs 80,00,000 (Rupees Eighty Laks) and paid the remaining Rs 30,00,000 (Rupees Thirty Laks) from his end to the seller.

His approximate EMI per month was Rs 80,000 (Rupees Eighty Thousand) and the total interest that he paid in the first year was Rs 7,80,000 and a principal of Rs 1,80,000.

Me Menon being in the 30% tax bracket,  is entitled to a deduction of Rs 1,50,000 of the interest paid to service the housing loan (Under Section 24) and Rs 1,00,000 of the principal can be accounted for in the deductions claimed in Section 80 C of the Income Tax Act.

 

Without Home Loan

With Home Loan

Income / Salary

2400000

2400000

Deductions - U/s 80 (Principal)

0

100000

Deductions - U/s 24 (Interest)

0

150000

Net Taxable Income

2400000

2150000

     

Income Tax

566500

489250

Hence approximately, Mr Menon can have a tax benefit of upto Rs 75,000 on the first property.

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Tax Benefit on 2nd Property

Now, for understanding the implication of a 2nd property, we assume that Mr Menon was transferred to Bangalore the next year. After a few weeks in Bangalore he decided to buy a property in Bangalore and put the Mumbai apartment on rent. He choose a ready 3 BHK apartment in Whitefield, for Rs 75,00,000 wherein he took a loan of Rs 40,00,000 and paid Rs 35,00,000 to the seller directly. His EMI is Rs 40,000 and the interest component for the year has been Rs 3,90,000 and the principal component is Rs 90,000. He was also started getting a rent of Rs 15,000 for the Mumbai apartment.

Hence a summary of his transactions are as follows:

 

Mumbai

Bangalore

Self Financed

3000000

3500000

Loan Amount

8000000

4000000

Total Value of Property

11000000

7500000

     

EMI

80000

40000

Principal Component

180000

90000

Interest Component

780000

390000

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Now the question is what is the amount of tax deduction will Mr. Menon get?

As a resident and for that matter as an NRI also, there is practically no limit to buying residential properties. As there is no limit to buying residential properties, all these properties can also be bought using borrowed funds like a housing loan from any bank.

In this case Mr Menon will get the befit for the self occupied Bangalore apartment as follows:

U/s 80- Principal               Rs 90000              

U/s 24 - Interest               Rs 150000

For the Mumbai apartment, which is now on a monthly rent of Rs 15000 there will be a Loss from House Property to the tune of approximately Rs 600000 (Rs 780000 – Rs 180000) (Calculations are not specific and have been simplified for understanding. Please do not use this formula for computing your tax)

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Hence the scenarios are reflected in the chart below:

Case 1: Where Mr Menon had purchased only 1 apartment in Mumbai:

Case 1

Mumbai Apartment

   

Salary

2400000

Indicative Income Tax

566500

   
   

Principal Paid

180000

Interest Paid

780000

Taxable Income

2150000

Indicative Income Tax

489250

(after taking Tax Benefit)

 
   

Expected Tax Savings

77250

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Case 2: Where Mr Menon has purchased 1 apartment in Mumbai which is on Rent and 1 apartment in Bangalore, which is self occupied:

Case 2

Mumbai Apartment

Bangalore Apartment

     

Salary

2400000

Rental Income

180000

 

Indicative Income Tax

622120

     

Principal Paid

180000

90000

Interest Paid

780000

390000

Taxable Income

1560000

Indicative Income Tax

306940

(after taking Tax Benefit)

   
     

Expected Tax Savings

315180

His total maximum tax deduction in the above example can become a humongous Rs 300000.

So we have seen here how a 2nd residential property can help you reduce your income tax liability to a large extent. A specific tax computation and implication for yourself required the input and expertise of a tax consultant who can optimize your tax payout and reduce it to a large extent being in the ambit of law.

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