2 homes? Check the tax impact

In Got a home loan? Read this, we explained how the tax man calculates the tax benefit on interest paid on a home loan.

However, when writing that article, we assumed you have just one house. Here's the lowdown on what happens when you take loans to buy two homes.

Can you take more than one home loan?

Yes, you can. You can get a home loan for the second house provided, of course, the bank feels you have enough income to pay off both loans.

Do you have to rent the second home?

No. You are under no compulsion to rent out the second home, though you can if you want to. You may reside in one home (which you own) and buy another home.

This could be for your parents or for yourself. You are not renting it out. In other words, both are for self occupation and not for renting out.

How is the tax benefit on both these home loans calculated?

If you have two homes, the calculation of income from house property has to be done separately for each home owned by you.

The rent you earn is the income from house property and the interest you pay on your home loan is negative income from house property.

This second house cannot be treated as self-occupied, since that status given to the first house; you can claim self-occupancy for only one house

Here is where the favour from the tax department ceases.

The tax department requires you pay tax on the notional rent on at least one of the houses. Notional rent is the rent you would have got had you given the house on rent.

Which house to choose from among the two (to be taxed on the basis of notional rent) is left entirely to you; you can also change your choice from year to year.

How is income from house property calculated?

Rental income net of municipal taxes	= Annual value	= A
Less
Standard deduction @30% of A		= S
Interest payable on home loan		= I
Income from house property	A S I	= H

The income or loss from the two houses, calculated separately as above, is aggregated and the net result (which can either be income or loss) is the 'Income from House Property'. As earlier, if it is a loss, it can be set off against other heads of Income. We explained the different income heads in Got a home loan? Read this.

Points to note

Since the second house is treated as being rented out (notional rent) for income tax purposes, the deduction for interest is not limited to Rs 1,50,000 in respect of the loan taken for this house.
The entire principal paid on both the loans will be eligible for deduction under Section 80C, subject to the overall cap of Rs 1,00,000.
When you own two houses, you may also be liable to pay wealth tax if the net value of the house (net of the loan), along with other assets chargeable to wealth tax exceeds Rs 15 lakh (Rs 1.5 million).

This example may help

Let's say you own two houses.

House 1

Bought for: Rs 50 lakh (Rs 5 million)

Loan: Rs 30 lakh (Rs 3 million)

Interest payable for the first year on this loan: Rs 2,25,000

Principal payable for the first year on this loan: Rs 35,000

You live in this home but you estimate that, if you rent out this property, it will fetch you a rent of Rs 25,000 per month (Rs 3,00,000 per annum)

If treated as self-occupied:

A = Rental Income	Nil
S =Less: Standard Deduction @ 30%	Nil
I = Less: Interest payable	Rs 2,25,000 but restricted to a max of Rs 1,50,000
Income from house property (Minus denotes loss)	A - S - I = (-) 1,50,000

If treated as notionally rented out

A = Rental Income	Rs 3,00,000
S = Less: Standard Deduction @ 30%	Rs 90,000
I = Less: Interest payable (no restriction)	Rs 2,25,000
Income from house property (Minus denotes loss)	A - S - I = (-) 15,000

House 2

Bought for: Rs 60 lakh (Rs 6 million)

Loan: Rs 40 lakh (Rs 4 million)

Interest payable for the first year on the loan: Rs 2,85,000

Principal payable for the first year on this loan: Rs 45,000

Your parents reside in this home. You estimate that, if you rent out this property, it will fetch you a rent of Rs 35,000 per month (Rs 4,20,000 per annum)

If treated as self-occupied:

A = Rental Income	Nil
S = Less: Standard Deduction @ 30%	Nil
I = Less: Interest payable	Rs 2,85,000 but restricted to a max of Rs 1,50,000
Income from house property (Minus denotes less)	A - S - I = (-) 1,50,000

If treated as notionally rented out:

A = Rental Income	Rs 4,20,000
S = Less: Standard Deduction @ 30%	Rs 1,26,000
I = Less: Interest payable (no restriction)	Rs 2,85,000
Income from house property (Minus denotes less)	A - S - I = Rs 9,000

Thus, in this case, you will choose House 2 as self-occupied as that will make the aggregate loss under the head 'Income from House Property' Rs 1,65,000 (loss of Rs 1,50,000 from the second property + loss of Rs 15,000 from the first property).

If you choose House 1 as self-occupied, the loss under the head 'Income from house property' would only be Rs 1,41,000 (loss of Rs 1,50,000 from the first property - profit of Rs 9,000 from the second property).

You will need to do this calculation every year and make an appropriate choice.

Some myth busters

As explained in Got a home loan? Read this, the interest payable on a home loan is not directly deductible from your salary income (or for that matter from your business income).
What actually happens is that a calculation of income from house property is made for each property you own. If such a calculation results in a loss, it is allowed to be set off against your income from other heads.
The deduction for interest payable on a loan taken to buy/ construct house properties (if you have more than one) is not subject to any overall limit. As explained earlier, the limit of Rs 1,50,000 is applicable only while calculating the income from one self occupied property.