Benefits of Joint ownership of loan and property

The beginning of a year is very crucial for tax payers! During this time not only do they struggle with various compliance procedures, but also search for the best investment options to save their taxes. In this hustle-bustle, unfortunately they overlook some of the benefits that can be claimed without any further investments. For instance, tax breaks on joint home loans. Now, most home loan borrowers are aware that repayment of principal component entitles them to deduction up to Rs 1 lakh under section 80C and section 24 allows tax benefits up to Rs 1.5 lakh on interest paid. However, not many couples know how to maximize tax breaks on joint home loan. If you belong to the growing tribe of couples who buy properties jointly, you need to know that each of you can claim both these deductions individually, thus optimizing your tax savings. Let us understand it in a little more detail: To understand this we need to connect the loan repayment amounts i.e. the EMI’s with taxation provisions. First of all there are to parts in the EMI of a loan i.e. (a) repayment of the principal amount and (b) Paying interest. In taxation too the benefits are claimed in the same segregation. Coming to the tax saving under section 80C you can claim deduction on the principal amount to a maximum of Rs. 1 lakh a year individually. Further in the interest portion you can claim a deduction to a maximum of Rs. 1.5 lakhs a year individually. Hence the total benefit for an individual is limited to Rs. 2.5 lakhs a year. Now the point we want to put forward is that what happens if the total EMI of the loan is greater than 2.5 lakhs a year. In this scenario we recommend that you buy the property jointly, with your spouse or parents or children. What are the benefits of this option? You must have noticed that the benefits u/s 80C and 24 are available individually to co-owners. Hence, if you buy the property along with a co-owner the total benefit sums up to Rs. 5 lakhs a year if the co-ownership ration is 50:50. Please Note: that the ownership ration in this case is crucial i.e. the benefit available to the co-owners depends on the ratio of ownership. That is, if you and your spouse own the house jointly in the ratio of 50:50, both can claim deductions in equal proportion. Therefore, if your tax slabs are different, you need to work out your ownership share in a manner that the spouse in the higher tax bracket owns a bigger share. Finally, however, the decision will boil down to the level of mutual understanding between the couple – if it is good, they can adopt this strategy. Else, a 50:50 arrangement might be a safer bet. Better still, it might be wise to go by the partners’ actual share in the loan taken or EMI paid. From the lenders point of view: Now, lenders insist on co-owners being co-borrowers in a housing loan, while it is essential for co-borrowers to be co-owners to be eligible for tax benefits. And, the co-ownership share plays a role in determining your deductions. Benefits on earning rental income: For people who let out the property for earning rental income, co-owning a property hits another strike, in terms of tax savings. How? As we know that the rental income is taxed under the head House Property, in case of co-ownership, the taxable income gets divided between the co-owners in the ration of co-ownership. Therefore, the total income has an opportunity to fall under the basic exemption limit of Rs. 2 lakhs twice and get reduced. Important Note: The co-ownership decision needs to be taken at the time of purchasing the property itself. If the buyer thinks about buying the property in his own name and later transferring a part of the property to a co-owner for claiming benefits, he/she will be caught in the cross fire of clubbing provisions. According to the clubbing provisions of the IT Act, transferring the property to your relative amounts to a gift. The income earned because of the gift (in this case the rental income from house property) gets clubbed with the income of the actual owner for income tax purposes. Increasing the taxable income and the tax liability of the actual owner. Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [info@taxmantra.com] or call us at +91 88208208 11. We would be more than happy to assist you.