Investing in real estate has always been a popular financial strategy, but did you know that buying property in a joint name can come with its own set of income tax benefits? A joint home loan not only doubles the chance of loan eligibility but also multiplies the tax benefits you can reap.
Navigating through these benefits can be esoteric, especially if you’re unfamiliar with income tax return filing. Therefore, it’s crucial to understand the nuances associated with joint home loans, and their tax advantages.
Pre-requisites for Availing Tax Benefits on a Joint Home Loan
While taking a joint home loan has its perks, there are certain conditions to avail the tax benefits. A common misconception is that all joint borrowers are entitled to these benefits. However, this isn’t the case. The Indian tax laws mandate that for a borrower to claim tax benefits on the property, they need to be a ‘co-owner’ of the property. This applies even if the repayment of the loan is handled by a single party.
For instance, picture a scenario where a father-son duo takes a joint home loan for a property that’s solely in the father’s name. In this case, while the son may contribute to the loan repayments, he won’t be eligible for the tax benefits since he isn’t a co-owner of the property. The idea behind this ruling is simple – no ownership, no tax benefit.
Conditions to Claim the Tax Benefit on the Property
In the labyrinth of property taxes and joint ownerships, the following conditions can help you pave your way to claim the tax benefits:
- Co-ownership in the property: The prerequisite to claim tax benefits for a home loan is to be an owner in the property. Even if the loan is taken jointly, the tax benefits would be lost on the borrower who isn’t an owner as per the property documents.
- Co-borrower for the loan: Alongside being an owner, you must be an applicant as per the loan documents. Non-contributing owners who are not co-borrowers of the loan won’t be entitled to the tax benefits.
- Completion of property construction: Tax benefits on a house property can be claimed starting the financial year in which construction of the property is complete. For under-construction properties, tax benefits are unavailable. However, expenses incurred prior to completion can be claimed in five equal installments starting the year the construction is completed.
Stay tuned as we delve deeper into the benefits and discuss Sections 24 and 80C in our forthcoming sections, where we’ll help you optimize your tax benefits as a joint owner of property.
Tax Benefits on a Joint Home Loan
Now that we understand the pre-requisites and conditions for availing tax benefits on a joint home loan, let’s dive into the specific tax benefits you can enjoy as a joint property owner.
Section 24: Deduction for Home Loan Interest
Under Section 24 of the Income Tax Act, each co-owner who is also a co-applicant in the loan can claim a maximum deduction of Rs 2,00,000 for interest on the home loan in their Income Tax Return. However, it’s important to note that the total interest paid on the loan is allocated to the owners in the ratio of their ownership in the property.
To illustrate, let’s consider Rahul and his father who bought a house on loan and paid Rs 4,50,000 in interest. They have a 50:50 share in the property. In this case, Rahul can claim Rs 2,00,000 in his tax return, and his father can also claim Rs 2,00,000.
Section 80C: Deduction for Principal Repayment
Additionally, each co-owner can claim a deduction of up to Rs 1,50,000 towards the repayment of the principal amount under Section 80C. This deduction falls within the overall limit of Rs 1,50,000 of Section 80C, which includes other eligible investments and expenses.
It’s important to note that the total deduction claimed by all owners together cannot exceed the actual principal amount repaid towards the loan. The deduction is available based on the ownership proportion, and each co-owner can claim it accordingly.
It’s worth mentioning that the tax benefits on a joint home loan can significantly impact your tax liability, especially when the total interest paid on the loan exceeds Rs 2,00,000 per annum.
Now, let’s take a closer look at a comparison between owning a property in a single name versus owning it jointly in terms of income tax benefits.
Owning a Property in a Single Name vs. Joint Ownership
- Self-Occupied Property:
- In the case of a self-occupied property, if the property is owned in a single name, only the owner can claim the tax benefits on the home loan.
- However, with joint ownership, each co-owner who is also a co-applicant in the loan can claim their respective shares of deductions for both interest and principal repayment.
- Rented Property:
- For a rented property, the budget of 2017 has restricted the deduction for interest on the home loan to the amount where the loss from such property doesn’t exceed Rs 2 lakh.
- Similar to a self-occupied property, each co-owner can claim deductions in the ratio of their ownership on the interest and principal amount.
It’s crucial to assess your specific circumstances and consult with a qualified chartered accountant, such as Ahuja & Ahuja, to optimize your tax benefits.
Understanding the Deduction Ratio
When it comes to joint home loans, it’s important to understand how the deduction ratio is determined. The deduction ratio determines the proportion of deductions that each joint owner is entitled to claim. It is based on the ownership proportion specified in the property documents.
For example, if two co-owners have an equal share of 50% each, they will be eligible for an equal share of deductions for both interest and principal repayment. If the ownership proportion is different, the deduction ratio will be adjusted accordingly.
It’s crucial to note that even though each joint owner can claim a maximum deduction of Rs 2,00,000 for interest on the home loan, the actual deduction will be in proportion to their ownership share.
Changing the Ratio of Tax Benefits
The ratio of tax benefits on home loans for joint owners may change if the co-ownership shares are altered. If both individuals are co-owners of the property, the tax benefits can be shared based on their proportion of shares. This means that you can consider your spouse’s repayment capacity to plan the share of the home loan.
For instance, let’s say joint owners have an equal ownership share, but their loan share is split 60:40. In this case, the tax benefits will also be shared in the same ratio. If the ratio is changed to 70:30, the tax benefits will correspondingly change as well.
Keep in mind that any changes in the co-ownership ratio should comply with legal requirements and be appropriately documented.
Stamp Duty and Registration Charges
Apart from the tax benefits on the home loan, it’s important to be aware that joint owners can also claim deductions for stamp duty and registration charges. These charges are an integral part of property transactions and can also contribute to reducing your tax liability.
To maximize your tax benefits and gain a comprehensive understanding of the subject, it is advisable to consult with experts such as Ahuja & Ahuja for personalized guidance tailored to your specific situation.
In conclusion, taking a joint home loan can offer substantial income tax benefits to the co-owners. To avail these benefits, it is essential to meet certain pre-requisites, such as being a co-owner and co-borrower of the loan. The completion of property construction is also an important factor in determining the eligibility for tax deductions.
Under Section 24 of the Income Tax Act, each co-owner can claim a deduction of up to Rs 2,00,000 for the interest paid on the home loan. Additionally, Section 80C provides a deduction of up to Rs 1,50,000 on the principal repayment.
Compared to owning a property in a single name, joint ownership allows for a larger tax benefit against interest payments when the total interest exceeds Rs 2,00,000 per annum. It’s important to consider the proportion of ownership and repayment capacity while determining the deduction ratio.
Lastly, don’t forget to explore the possibility of claiming deductions for stamp duty and registration charges, as they can further enhance your tax benefits.
Remember, optimizing your tax benefits and navigating the complexities of joint home loans requires expertise. Consultation with chartered accountants, such as Ahuja & Ahuja, can provide you with personalized guidance and help you make informed decisions.
Can all joint borrowers claim tax benefits on the home loan?
No, to claim tax benefits, the borrower must also be a co-owner of the property as per the property documents.
Can the entire interest payment be claimed by one co-owner if the other co-owner is not contributing?
Yes, if one co-owner is paying the entire loan installment, they can claim the entire interest amount as a deduction in their Income Tax Return.
Can the ratio of tax benefits be changed among joint owners?
Yes, the ratio of tax benefits can be changed if the co-ownership shares are altered. However, any changes must comply with legal requirements and be properly documented.
Are tax benefits available for under-construction properties?
Tax benefits on a house property can only be claimed once the construction is complete. However, expenses incurred prior to completion can be claimed in five equal installments starting from the year of completion.
All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice.