Written By- Jaya Pathak
Buying a home of your own is one of the biggest financial commitments an individual can make. The price of property is rising, prompting many buyers to opt for joint home loans in order to share the financial burden with a co-borrower, typically a spouse or a family member. A joint home loan will make the ownership of home affordable as well as it will offer significant tax benefits which can help the borrower to reduce the taxable income and eventually save money.
The Income Tax Act of India provides various tax deductions on home loan principal and interest payments which allows the borrowers to ease their financial burden. To fully avail these benefits, taxpayers must understand the eligibility criteria, tax provisions and conditions applicable to joint home loans.
In this blog, we will discuss how joint home loan borrowers can avail the benefits of tax and maximize their saving.
Understanding joint home loans
A joint home loan is basically a loan which is taken by two or more go borrowers, typically a family member or spouse. Both the co-borrowers share the responsibility of repaying the loan and they also enjoy tax benefits under section 8C and section 24B of the Income Tax Act.
Features of joint home loans
- As the financial responsibility is shared among co-borrowers, the burden of repayment is reduced.
- As it considers combined income, the loan eligibility also heightens.
- Co-borrowers can claim tax benefits individually which will double the tax saving potential.
- In a joint home loan, the ownership and repayment proportion determine the amount of tax benefits available.
Understanding tax benefits on joint home loans
The tax benefits on joint home loans can be availed under different sections of the Income Tax Act, 1961. Both the co-borrowers can claim deductions separately if they meet certain eligibility criteria. The tax benefits on home loans are listed below-
- Under section 80 C, co-borrowers can claim a deduction of up to rupees 1.5 lakh each for the repayment on the principal amount taken for a home loan. The co-borrowers must also be the co-owners of the property. The house which is set as a collateral must not be sold within five years of purchase, otherwise deductions claimed earlier will be reversed. This deduction is applicable only for the loans which have been taken from approved financial institutions.
If both the applicants qualify for the deduction on principal repayment, then they can claim a total deduction of ₹3,00,000 on principal repayment, significantly reducing the taxable income. - Under section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to 2,00,000 each on the interest to be paid for a self-occupied home. The home loan must be taken for the purchase or the construction of a house, construction may be completed within five years from the end of the financial year in which the loan was taken, a maximum deduction is available per co-borrower is rupees 2,00,000, provided they contribute to the repayment.
For example, if a couple has taken a joint home loan and pays 4,00,000 in interest annually, both can claim ₹2,00,000 each, totalling 4,00,000 deductions under section 24(b). - To encourage the first-time home buyers, government provide additional deductions under section 80 EE and 80EEA. In section 80 E, an additional deduction of rupees 50,000 on the interest paid for the first time home buyers is offered to the borrower, if the loan amount does not exceed ₹35,00,000 and the value of property is below 50,00,000.
In section 80 EEA, an additional deduction of one 1.5 Lakh rupees is provided to the borrower on interest paid for loans taken under the affordable housing scheme. This scheme is applicable to the home loans which is sanctioned between April 2019 and March 2022.
Ownership and repayment proportion
In order to avail the full text benefits, the borrower must ensure that only co-owners are eligible for the tax benefits. If a person is only a co-borrower but he is not a co-owner, he cannot claim deductions. The tax benefit is available on the proportion of equated monthly installments payment made by each borrower. The borrowers must ensure that bank statements or loan amortization schedules are available as a proof of repayment. Take an example. If one co-borrower contributes 60% towards the equated monthly payments and the other contributes 40% then the tax benefit will also be divided in the same proportion.
Benefits of availing joint home loan tax deductions
- The overall tax benefit is doubled as both the co-borrowers can claim deductions separately. The higher tax savings results in reducing the effective cost of borrowing.
- Borrowers can secure a higher loan amount with their combined incomes. The enhanced loan eligibility will make it easier for the borrowers to afford expensive properties.
- Joint home loan provides flexibility in terms of repayment structure. The Co-borrowers can share the repayment responsibility, reducing the financial stress.
- The joint home loan encourages home ownership. The tax incentives have made the home loans more affordable, and it has encouraged families to invest in real estate.
Can a rental property owner avail the benefit of joint home loans?
If your property is rented out, then the tax benefits are even more attractive. There is no upper limit on the interest deduction for rented properties. The self-occupied properties have a limit on interest deduction of around ₹2,00,000, but in the case of rented property, there is not any upper limit. The homeowners can deduct municipal taxes and claim a 30% standard deduction on a rental income before calculating taxable income. This makes joint home loans an excellent option for the real estate investors who are looking to maximize the tax benefits.
Things you should consider before taking the tax benefit of joint home loans
- You must know that only co-owners can claim the benefits of tax.
- Ensure that the equated monthly installments contributions are recorded properly.
- If you are thinking to sell property before five years then it can lead to a reversal of Section 80 C deductions.
- Certain deductions are time sensitive. Ensure that you do not miss the deadline for any home loan sanction.
Conclusion
Taking a joint home loan is a smart move as it maximizes the tax benefits. In order to leverage deductions under various sections, the co-borrowers can significantly reduce their taxable income and make the ownership of home more affordable. In order to avail most of the tax benefits, borrowers must ensure that their property is registered, they have a proportionate repayment and compliance with tax laws. By a strategic planning, taxpayers can optimize their tax savings while fulfilling the dream of owning a home.
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