Deduction for Housing loans and Second House property

If an individual holds more than one property in his name, only one such property may be considered as self-occupied and the others are classified as ‘deemed rented out’.  The property to be classified as deemed rented out is at the individual’s discretion. From taxation angle deemed let out house increases your tax liability in case standard deduction and interest on 2^nd loan is lower than the annual rental value (I.e it will result in addition of income in your total income).

Deduction on account of principal repayments is capped at R 1.5 lakh under Section 80C provided that the house property is not sold within 5 years of obtaining the possession. However, AO’s have been denying deduction available for repayment towards the principal portion of housing loan under section 80C for second housing property. 

Interest Deduction on Housing Loan

 The deduction available on account of interest for a self-occupied property is limited to Rs 2 lakh per year.

The interest portion paid on ‘rented out’ properties is allowed without any cap (The cap of Rs 2 lakh u/s 24 is for interest paid on Self occupied house property).  However, if the property is not acquired/constructed within three years ( 5 years from 01^st Apr 15) from the end of the financial year in which the loan was taken, the interest benefit would be reduced to R 30,000 only. In case of let out property construction can be completed after 3 years also and there would be no cap of Rs 30000.

House doesn't have to necessarily be occupied by the taxpayer for it to be considered a self-occupied house. Members of the family - spouse, parents and children - may also be living there.  

Sec 24 (Interest) deductions in various scenarios

a)    One Own house but not self occupied (I.e living in rented accommodation).

In case a property has neither been self-occupied by the owner (or his family members) by reason of the fact owing to his employment, business or profession carried on at any other place (i.e he has to reside at that other place not belonging to him) nor the property is let out, then the same will be treated as self occupied and cap of Rs. 2 Lakh under Section 24 will be attracted. In case you receive HRA allowance in salary, you can claim deduction based on rent paid.

b)    Two houses of which one is self occupied

In case of deemed let out also the cap of Rs 2 lakh won’t be attracted.

c)    Second house is actually let out

In case the property has actually been let out than the cap of Rs 2 lakh won’t be attracted.

Other Points

In case you have paid EMI, you should obtain certificate from your borrower bifurcating the same between principal and interest. 

Tax benefits can be claimed for multiple home loans. However overall cap of Rs 1.5 lac and Rs 2 lac (in case of self occupied) will be seen in totality and not loan wise. 

Interest benefit once availed will not be reversed/added back even if the house property is transferred within 5 years. 

The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal instalments for 5 successive Financial Years starting from the year in which the construction has been completed.

For any loan taken for repair, renewal and reconstruction, there is no tax benefit on principal repayment. The tax benefits on interest payment under Section 24 for such loan shall be limited to Rs 30,000 per financial year for Self occupied property and without any cap for let out property.

Loss under house property can be adjusted against salary and can be carried forward for 8 years.