Home loan deductions: Some myth busters

Can I get deduction for home loan repayments on more than one property? Is the overall deduction for interest payable restricted to Rs 1,50,000?

I am staying in a flat, the cost of which was financed through a home loan. I am planning to buy another property which I will use as my second home. Will I be eligible for any tax benefits on the loan taken to finance the acquisition of this second property?

Contrary to popular opinion, there is no overall restriction of Rs 1,50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person. Home loan repayments are eligible for deduction for each such property. How is income from house property calculated? Here's how...

Rental income net of municipal taxes = Annual value = A
Less (minus)
Standard deduction at 30 per cent of A = S
Interest payable on home loan = I
Income from house property (H) = A minus S minus I

Click NEXT to read about various scenarios while calculating interest and principal deduction on home loans.

When you take a loan to buy a property to live in -- your first one the taxman calls it a self-occupied property.

In this case, rental income is treated as 'nil'. Not a great favour really, because you anyway don't derive any rental income from such property as you stay there.

Therefore, when you calculate the income from this property, it will always result in a loss equivalent to the interest payable on the loan taken to acquire/construct such a property (since you start from zero (A) in the above formula and deduct the interest payable (I) for the loan taken to acquire that property).

Hence, A = 0 and S will be = 0 as well since 30 per cent of zero is zero. Thus the only deduction available is the interest payable on the home loan taken to buy the self-occupied property.

In such cases, where A is allowed to be taken as nil, the taxman restricts the deduction for interest per annum to Rs 1,50,000, as per Section 24 of the I-T Act.

Thus, in such cases, the income from house property will always result in a loss equivalent to the interest payable on the home loan or Rs 1,50,000; whichever is lower.

This loss under the head 'income from house property' is allowed to be setoff against your salary/business income.

Section 80C

The principal repaid is allowed as a separate deduction under Section 80C subject to the overall limit of Rs 1,00,000.

Click NEXT to read how you calculate deductions when you own two homes.

Now let's say you stay in a self-owned residence and purchase another property. This could be for your parents or for self-occupation. But, it has not been rented out. In other words, this too is for self-occupation.

You can still get a home loan for the second house. Provided, of course, the bank feels that you have enough income to pay back both the loans. But, this time, the taxman will view it differently.

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

Here is where the favour from the tax department ceases. The tax department requires that 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. As an owner of two homes, you can choose a self-occupied property and the other will be taxed on the basis of notional rent. You can also change your choice from year to year.

Using the above formula, the income from such a home will be calculated.

Since this house is treated as being rented out, for income tax purposes the deduction for interest is not limited to Rs 1,50,000 in respect of loan taken for this house.

The income or loss from the second house, calculated separately as above, is aggregated and the net result (which can either be income or loss) is the 'income from house property' (if it is a loss it can be setoff against other heads of income).

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 more than one house, 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. Even for wealth tax purposes, the value of one self-occupied house is allowed to be deducted.

Click NEXT to read illustrations about calculating deductions.

Let's say you own two houses and you reside in this house.

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 estimate that if you rent out this property, it will fetch you a rent of Rs 25,000 per month (that is, Rs 3,00,000 per annum).

House 2

Bought for: Rs 60 lakh (Rs 6 million)
Loan: Rs 40 lakh (Rs 4 million)

Your parents reside in this house.

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
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).

The calculation for income from house property for each of the houses is given below:

House 1

If treated as self-occupied:

Rental income = Nil

Less:

Standard deduction at 30 per cent = Nil
Interest payable Rs 2,25,000 but restricted to a max of Rs 1,50,000
Income from house property (minus denotes loss ) (-) Rs 1,50,000

If treated as notionally rented out then:

Rental income = Rs 3,00,000

Less:

Standard deduction @ 30 per cent = Rs 90,000
Interest payable (no restriction) = Rs 2,25,000
Total outgo = Rs 3,15,000
Income from house property (minus denotes loss ) = (-) Rs 15,000

House 2

If treated as self-occupied:

Rental income = Nil

Less:

Standard deduction at 30 per cent = Nil
Interest payable Rs 2,85,000 but restricted to a max of Rs 1,50,000
Income from house property  (minus denotes loss) (-) Rs 1,50,000

If treated as notionally rented out then:

Rental income = Rs 4,20,000'

Less:

Standard deduction at 30 per cent = Rs 1,26,000
Interest payable (no restriction) = Rs 2,85,000
Total outgo = Rs 4,11,000
Income from house property = Rs 9,000 (Rs 4,20,000 minus Rs 4,11,000)

Thus, in this case, you will choose the second property 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 the first property 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.

Click NEXT to read some home loan deduction myth busters.

Contrary to popular perception, 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 setoff against your income from other heads.

Also contrary to popular opinion, the deduction for interest payable on a loan taken to buy/construct house property/ properties (if you have more than one property) 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.