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You get several benefits for buying a house and taking a housing loan. The interest paid on this housing loan is allowed as a tax benefit, upto a limit of Rs. 1,50,000. Also, the principal amount repaid is also allowed as a tax deduction under 80C, subject to an annual limit of Rs. 1,00,000.
The Good Part
For the first house, you can get tax benefit on interest paid on loan only upto Rs. 1,50,000. But for the second house, there is no ceiling on the interest tax benefit. If you pay Rs. 5,00,000 for the second house, and Rs. 92,000 for the first house as interest, you can get a total interest deduction of Rs. 5,92,000, assuimg that the first house is self-occupied.
If you have rented out one house, you will get a standard deduction of 30% on rental income. You will also be allowed to deduct municipal taxes paid from the income. So, if you have rented out the house for Rs. 3,00,000 a year, and have paid Rs. 50,000 as interest on loan, and Rs. 9,000 as municipal taxes, your taxable income from the house will be Rs. 1,53,700 ( 3,00,000 – 9,000 – 87,300 – 50,000 )
So, what’s the problem with taking another housing loan and buying a second house?
The Bad Part
You are allowed a tax deduction on the principal repayment under 80C upto Rs. 1,00,000. This limit remains unchanged, irrespective of the number of houses you own. You will still be allowed a collective deduction of Rs. 1,00,000 under 80C.
Let us suppose that you occupied the second house for your residence, and let the first one remain vacant. According to the provisions of income tax, you will have to pay income tax on rent for the first house.
But the first house is vacant; there is no rent! Yes, it sounds bizzare, but you will have to pay rent on deemed, or notional rent from the first house.
About the Author: This is a guest article by TaxFile.in – a portal for return efiling of income tax india