Tax benefits of a second home (case of joint loan)

Mr Shankar,  under the I-T act, if an assesse owns more than one house then one of the house is considered as Self-occupied & the remaining house(s) are considered as Deemed to be let-out property & would be offered for tax by taking the fiar value of the property in the adjoining area as rental income.  However you would get the benefit of Municipal taxes paid on the house property & on the balance you will get the benefit of 30% standard deduction & the interest paid on home loan.

The selection of the house is left upto the discretion of the assessee. he can seelct any one house as self-occupied & the remaining house(s) as deemd to be let out.  So you will have to analyse the interest component that you paying on both the houses.  The house on whihc the interest component is high, consider that house as Self-occupied & the other house as deemd to be let out.  For the self occupied house you will get the benefit of itnerst upto only Rs.1.5lacs.

In case of the deemed to be let out property,  you will get deduction towards interest actually paid on home loan and not only rs. 1.5 lacs

On the 2nd home lona if your wife is the co-owner of the property then she will also get the benefit of the itnerest dedcution upto Rs. 1.5lacs.  But if she is only a co-borrower thne she will not get any benefit, even if she is paying the EMi, as u/s 22 of the I-T only the person who is the owner of the house property, is eligible to get the deduction under house property.

Mr. Giridhar, 

Thanks so much for the detailed answer. This is helpful.

I have a few more queries:

1) You have mentioned that  I declare the house with the biggest loan amount as self-occupied.  And you have also said that for a self-occupied house, the interest benefit is capped to 1.5 lacs.  But for a deemed-let out property, the interest benefit is not capped (so it can be more than 1.5 lacs).

So in that case, should I not declare the house with the biggest loan amount as deemed-let out?  So that I get benefit on the huge interest I will be paying for this loan?  If there are specific reasons, pls. let me know.

2) Just to clarify on the 2 loan scenario.  If my interest from one loan is 2 lacs and the interest from the other loan is 3 lacs, I can claim benefit for a sum of 1.5 (capped interest) + 3 lacs =  4.5 lacs? (Depending on which house I show as self-occupied)?

3) Yes, my wife will be a co-owner and co-borrower.  In this case, how will the tax benefits split?  Do we need to show proof of our individual contribution to the loan? Or can we simply the interest component equally or otherwise? (for e.g. for my wife this is the first loan, so I suppose her interest benefit will be capped to 1.5 lacs, but for me it is the 2nd loan, so it will not be capped.)

Thanks again, 

Hello Mr Shankar,

for your 1st question, yes you should show the house with huge interest as self-occupied, so that you get the tax benefit upto Rs. 1.5 lacs each for your & your wife.

For your question 2 what your are saying is correct

for your question 3, you both can decide the ratio in whihc the interest & principal could be divided between you two.  Better to make an agreement between you two, so that it would be a proof for any future happenings.  The person whose income is in the hihg tax bracket can take a high share say about 70-75% & the person whose income is in the low tax bracket can tak a less ratio say about 25-30%.  the interest benefit would be only upto 1.5lacs each & would not alter if it is the first loan or second loan.

Hello Mr Shankar,

for your 1st question, yes you should show the house with huge interest as self-occupied, so that you get the tax benefit upto Rs. 1.5 lacs each for your & your wife.

For your question 2 what your are saying is correct

for your question 3, you both can decide the ratio in whihc the interest & principal could be divided between you two.  Better to make an agreement between you two, so that it would be a proof for any future happenings.  The person whose income is in the hihg tax bracket can take a high share say about 70-75% & the person whose income is in the low tax bracket can tak a less ratio say about 25-30%.  the interest benefit would be only upto 1.5lacs each & would not alter if it is the first loan or second loan.

Mr. Giridhar, 

Thanks again.  I'm sorry, I think I'm missing something.  I want to clarify this a little better:

Scenario 1:  For a minute, let's assume that the loan is only taken by myself.  So I have 2 loans.  So I get an interest deduction of 

a) 1.5 lacs on my first loan

b) Full amount (could be more than 1.5 lacs) on my 2nd loan.

So if interest is 3 lacs on the first loan and 5 lacs on the 2nd loan, I get 

1.5 + 5  = 6.5 lacs interest deduction benefit.

Is this correct?

Scenario 2:  Let's take that I include my wife as a co-owner/ co-borrower for the 2nd loan.  And we work out an agreement of 50-50% split in paying the loan.

So in this case,  I get an interest deduction of 

1.5 lacs from the first loan + 50% of 5 lacs from my 2nd loan.  i.e. a total of 4 lacs.  

My wife gets an interest deductinon of 1.5 lacs (50% of 5 lacs capped at 1.5 lac).

Is this correct?

yes Mr Shankar, both of the scenarios as stated by you are correct.

Mr. Giridhar,

Thanks so much again.  I'm clear on this.

Sorry , I have 2 small questions:

1) My understanding is that I should declare the property with a bigger loan as let out, so that there is no cap on the interest.  

But you have said that we should declare the property with the bigger loan as self-occupied.  Why is this?

2) And secondly, is the principal component treated as usual, under section 80c for the 2nd loan also?

in case of the DLOP, the rent that we show is nominal that is being offered for taxation.  So we can declare the property with low interest payout for this property.  But you can also show the preperty with high interest as DLOP, as you can show a loss in that case and set-off the same against your income from salary.  Also the interest deduction whic you are claiming in case of your second property is also deductible from your gross total income.  So your tax outgo would be reduced cnsiderably if the interest component on both the properties is high.

the principal on both the properties wud be deductible u/s 80C subject to an overall limit of Rs.1lacs on both the houses in aggregrate.

Thanks again Mr. Giridhar.  This is most helpful.

Mr. Giridhar,
I own a 2BHK flat (loan completed in 2010) and last year I purchased a piece of land (plot) by taking SBI Realty Home loan.  I have built a 6-7 feet tall boundary wall on all sides of the plot with  a main gate and inside there is a 10ft by 15 ft tin roof room along with a bathroom.  A care taker lives there to avoid unwanted circumstances since i heard of people forcefully occupying/capturing others land in that area.

I am talking to Municipal tax people to get this room assessed for house tax etc.

Under these circumstances can this be treated as a second house for tax rebate purposes ?

Regards

Prem

For a house to be considered as house property under the I-T Act,  there is no threshold that the  house should be of so much square feet.  The only requrieemtn is that the house should have walls on all the four sides & a roof at top.

Hence if your tin roof room satisfies this condition then it would be a house property including the lands appurtenant to your property.  So you can treat this as your second house.  But one of house whould be considered as deemed to be let out propety & income should be calculated accordingly & offered for taxation.

Mr. Giridhar:

Thank you so very much for your reply.  I small doubt still remains.

is it nessessory that  the room (second house in question) should be in the books of Municipal corporation in terms of House tax,  water tax , electricity connection etc to avail the tax rebate?  or just four walls and roof satisfies the requirement for tax rebate. Please suggest.

kind regards

prem

Dear Girdhar,

I have 1st home loan which is joint with my wife of 27Lakh with interest around 2.0 Lakh/year. And I am planning to buy second home, and not want to sell the 1st as it may give good returns next couple years. If I took second home loan of 25lakh which will be joint with my wife which will have interest around 2.0 lakh/year.

And For 1st home loan, I took benefit of 50% of principle + interest and my wife took 50%.

Then, On 2nd Home loan interest, am I or my wife able to take 50-50 or 100%  benefit ?