Home Loan Tax Benefit on Second Home: Rules for FY 2026-27
Home loan tax benefit on a second home: two self-occupied houses share one ₹2 lakh interest cap; a let-out home gets full interest against rent. Worked example.
In this article
You can claim home loan tax benefits on a second home in India, but how much depends on whether you live in it or rent it out. Under the old regime, up to two houses can be self-occupied, and their interest together is capped at ₹2 lakh a year under Section 22 of the Income-tax Act, 2025 (old Section 24(b)). If the second house is let out, its interest is deductible against the rent with no rupee cap, and up to ₹2 lakh of any loss can be set off against salary. Principal on both loans shares the single ₹1.5 lakh limit under Section 123 (old Section 80C).
The rules at a glance
| Situation | Interest deduction (old regime) | Interest deduction (new regime) | Principal (Section 123) |
|---|---|---|---|
| One self-occupied house | Up to ₹2 lakh | Not allowed | Within ₹1.5 lakh, old regime only |
| Two self-occupied houses | ₹2 lakh combined for both | Not allowed | Within one ₹1.5 lakh limit |
| One self-occupied + one let-out | ₹2 lakh on the first; full interest on the let-out house against its rent | Let-out house only, up to its rent | Within one ₹1.5 lakh limit |
| Three or more houses | Two may be self-occupied; the rest are deemed let out | Deemed let-out houses only, up to notional rent | Within one ₹1.5 lakh limit |
| Loss from house property | Set off up to ₹2 lakh against other income; balance carried forward 8 years | No set-off, no carry forward | — |
Figures as of October 2026, FY 2026-27. Limits are per taxpayer. Joint owners who are co-borrowers can each claim within their own limits.
Option 1: both houses self-occupied
Since FY 2019-20, you can treat two houses as self-occupied. Both have nil annual value, so no notional rent is taxed. This suits someone who owns a home in their work city and another in their home town that family uses, or a holiday home that stays empty.
The catch is the cap. The ₹2 lakh interest deduction for self-occupied houses applies to both houses together. If you already pay ₹2 lakh of interest on the first loan, the second loan's interest gives no further deduction while both are self-occupied.
Other conditions carry over from the single-house rules:
- The ₹2 lakh cap applies if the house is acquired or constructed within five years from the end of the financial year in which the loan was taken. Otherwise, the cap for that house falls to ₹30,000, still within the combined limit.
- Interest paid before construction is complete is claimed in five equal instalments from the year of completion, within the same cap for self-occupied houses.
Option 2: second house let out
If you rent the second house out, it is taxed as a let-out property:
- Rent received or receivable for the year = gross annual value.
- Less municipal taxes paid = net annual value.
- Less 30% standard deduction on net annual value.
- Less the full interest on its loan, with no rupee cap.
If this produces a loss, under the old regime the total loss from house property, from all houses combined, can be set off against salary and other income up to ₹2 lakh a year. Any excess is carried forward for up to eight years, to be set off against house property income only.
Option 3: three or more houses
You can choose any two houses as self-occupied, and the choice can change from year to year. Every other house is deemed let out: you must declare a notional rent, usually the rent it could reasonably fetch, even if it is vacant. You then deduct municipal taxes, the 30% standard deduction and the interest on that house's loan, as for a let-out house. Choose the two self-occupied houses so that the higher-value houses, which would carry a higher notional rent, are not the deemed let-out ones.
Worked example: second home self-occupied vs let out
Illustrative. Anil, in the 30% slab under the old regime, has two home loans in FY 2026-27:
- House 1 (where he lives): interest ₹1,60,000
- House 2 (in his home town): interest ₹1,20,000
- Principal repaid: ₹80,000 on House 1 and ₹60,000 on House 2. He has no other Section 123 investments.
Scenario A: both houses self-occupied
| Item | Amount |
|---|---|
| Interest on both houses: ₹1,60,000 + ₹1,20,000 | ₹2,80,000 |
| Allowed (combined cap) | ₹2,00,000 |
| Interest giving no benefit | ₹80,000 |
| Principal: ₹80,000 + ₹60,000 (within ₹1.5 lakh) | ₹1,40,000 |
| Tax saved: (₹2,00,000 + ₹1,40,000) × 31.2% | ₹1,06,080 |
Scenario B: House 2 let out at ₹20,000 a month, with ₹6,000 municipal tax
| Item | Amount |
|---|---|
| House 2 rent: ₹20,000 × 12 | ₹2,40,000 |
| Less municipal tax | −₹6,000 |
| Net annual value | ₹2,34,000 |
| Less 30% standard deduction | −₹70,200 |
| Less House 2 interest | −₹1,20,000 |
| House 2 income | ₹43,800 |
| House 1 (self-occupied) interest | −₹1,60,000 |
| Net loss from house property | −₹1,16,200 |
The ₹1,16,200 loss is within the ₹2 lakh set-off limit, so it all reduces his salary income. Principal is unchanged at ₹1,40,000.
- Tax saved from house property and principal: (₹1,16,200 + ₹1,40,000) × 31.2% = ₹79,934.40.
- He also earns ₹2,34,000 of rent after municipal tax.
The deduction is smaller in Scenario B because part of the interest is used against the rent, but Anil's total cash position is far better: rent after municipal tax plus tax saved is ₹3,13,934 against ₹1,06,080 when the house stays empty. Letting out also uses all ₹2,80,000 of interest, while Scenario A wastes ₹80,000. The trade-off is effort, wear and tear, and tenancy risk; see rental income, vacancy and maintenance for the real yield after costs.
The new regime and a second home
Under the new regime (Section 202, old Section 115BAC):
- No interest or principal deduction for either self-occupied house.
- For a let-out or deemed let-out second house, interest is deductible against its rent, but if the result is a loss, it cannot be set off against salary or other income, and it cannot be carried forward.
- Principal, stamp duty and registration are not deductible.
In Scenario B above, under the new regime, House 2's positive income of ₹43,800 would be taxable, and House 1's interest would give no benefit. Read the full rules in home loan tax benefit in the new regime, and compare your actual tax under both regimes with the income tax calculator.
Other points for second-home buyers
- Principal on both loans shares the single ₹1.5 lakh Section 123 limit with EPF, PPF, ELSS and insurance. Many salaried borrowers fill it with EPF alone.
- Stamp duty and registration for the second home also fall within the same ₹1.5 lakh, in the year paid.
- Sale within five years: if you sell a house within five years from the end of the financial year in which you got possession, principal deductions claimed for that house under Section 123 are reversed and taxed in the year of sale.
- Joint ownership: if both spouses are co-owners and co-borrowers on the second home, each can claim within their own limits, which can lift the household's total deduction.
- Capital gains: selling one house and buying another may involve capital gains tax and exemptions for reinvestment; see tax on FD, mutual funds and stocks for how capital gains are taxed generally.
For the full list of home loan deductions, conditions and how to claim them, read the pillar guide on home loan tax benefits.
Key takeaways
- Up to two houses can be self-occupied, but their interest shares one ₹2 lakh cap under Section 22 (old 24(b)).
- A let-out second home gets full interest against its rent, with up to ₹2 lakh of loss set off against other income in the old regime.
- A third house is deemed let out and taxed on notional rent, even if vacant.
- Principal on all home loans shares one ₹1.5 lakh limit under Section 123 (old 80C), old regime only.
- The new regime gives no benefit for self-occupied houses and allows no loss set-off or carry forward on let-out ones.
Frequently asked questions
Can I claim home loan tax benefit on a second home?
Yes, under the old regime. If both houses are self-occupied, their interest together is capped at ₹2 lakh a year under Section 22 (old Section 24(b)); if the second house is let out, its interest is deductible against the rent without a rupee cap.
Can I treat two houses as self-occupied?
Yes. You can treat up to two houses as self-occupied, with nil annual value for both. A third or further house is treated as deemed let out, and a notional rent is taxed even if it is vacant.
Is the ₹2 lakh interest limit per house or in total?
In total. For self-occupied houses, the ₹2 lakh interest limit applies to all of them together, not ₹2 lakh for each house.
Can I claim principal on both home loans?
Yes, principal repaid on both loans qualifies under old Section 80C, now Section 123, but only within the single ₹1.5 lakh limit, which also covers EPF, PPF, insurance and other items. This is available only in the old regime.
What is the tax benefit on a second home in the new regime?
None for a self-occupied second home. If the second home is let out, interest is deductible against its rent, but any resulting loss cannot be set off against other income or carried forward.
This article is for general education and is not personalised financial, tax or legal advice. Rates and rules are as of 21 Oct 2026; confirm current terms with your lender, AMC or a qualified adviser.
