The Must-Know Changes in Second Home Loan Tax Benefits

Many people buy second home to earn money in the form of rent collected from the tenants. However, the Finance Bill 2017 is going to hit hard as it comes with a variety of changes that can make things difficult for such people.

According to the Finance Bill 2017 the tax benefit on loan repayment of a second house is to be limited to only Rs. 2 lakh per annum.  Earlier, a home buyer was allowed to deduct the entire interest amount paid on the second home loan.

Let’s consider an example how this new rule will affect you if you bought a second property with a home loan. So, say you bought a house for which your interest outgo in the first year alone is Rs. 10 lakh. Let’s assume that you are earning a total rent of Rs. 4 lakh every year. In this case, you will be allowed to adjust the difference of Rs. 6 lakh (the amount remaining after deducting 4 lakh from the 10 lakh interest) against any head of income. However, in the second financial year you can enjoy deduction only up to Rs. 2 lakh. The Rs. 4 lakh that remains how will be carried forward up to eight financial years, and adjusted later.

According to Amit Maheshwari, who is a partner at Ashok Maheshwary & Associates LLP, this new rule will greatly affect the real estate business. This is because the people who buy properties on leverage to benefit from real estate losses on account of big difference in the interest rates and rental yields will suffer greatly. The capping implemented is too low, although it was implemented to discourage purchasing of real estate for investment reasons.

What now?

The Finance Bill 2017 has certainly raised some hurdles for the real estate investors. However, this shouldn’t discourage you from investing in a second home. It still has many advantages.

While the interest deduction will stay capped at Rs. 2,00,000 for a self-occupied property, if you will let it out or leave it vacant you can claim as much interest payment for tax benefits. You won’t have to pay the wealth tax (if you have more than one house in your name) if you will let out the second house. However, to enjoy these benefits you will have to let the house out for a minimum period of 300 days in a year. If you want even greater tax reduction you can treat your property with a high annual value as self-occupied.

Applying for a second home loan

Home loans are not easily sanctioned by banks and other financial institutions. Here are some good tips on how you can get your second home loan approved easily:

  • Enhance Credit Score: Almost every single loan applicant has to pass the test of credit check. Your credit score has to be high enough to make the lender confident in your creditworthiness. So, be sure to check your score before you apply. Make sure that your score is above average and your name is not on the CIBIL defaulters list.
  • Get a Guarantor or a Co-Applicant: If your loan application is rejected then you can get a guarantor or a co-applicant to apply for the loan along with you. This will greatly increase your chances of approval, especially if the other person has a good credit score.
  • Show a Reliable Income: A reliable and stable income is a good way to convince a bank to approve a loan for a second home. If you are a budding entrepreneur or have a small income then the lender might find your profile risky.
  • Provide Assets: If you don’t have a high income then also you can convince your lender by disclosing your assets. They can give the lender some confidence in you, especially if you are willing to use these assets as collateral.

The home loan interest rates are increasing every year. So, if you want to invest in property then today is as good time as any. Be sure that when you apply for the loan you calculate the EMIs, etc. with a home loans EMI calculator to get an idea how it will affect your monthly expenses. Also, do whatever possible to increase CIBIL score as it will make it easier to get a loan.