The tax laws allow you to avail certain benefits with respect to respect home loans. The benefits are available under Section 24(b) for interest paid and under Section 80C for the principal repayment, subject to certain conditions. Couples usually opt for a joint home loan, as this can enhance their home loan eligibility. However, there is considerable confusion, about who can claim the home loan benefit and how much tax benefit one can claim, with respect to joint home loans.
Co-borrowers and co-owners of the property
Section 26 of the Income Tax Act, gives clear-cut guidelines, for taxation of your share in the jointly owned property. In case of a joint ownership of any house property, you are taxed as an individual with respect to your share in the property. So, if your share in the joint property is certain or ascertainable, you cannot be taxed as a Body of Individual (BOI) or Association of persons (AOP).
A basic condition for claiming tax benefits, is that you should be a co-borrower of the loan, as well as a joint owner of the property. Unless you satisfy this basic condition, you cannot claim the tax benefits on the home loan. In certain cases, a person merely joins another immediate family member (father, son or spouse), to enhance the loan amount eligibility, without having any share in the property purchased. In such cases, the co-borrower, who is not a joint owner of the property, cannot claim the tax benefits on such home loans. This is one of the reasons that you should buy the property in joint names and then, individually claim the tax benefits.
See also: Taxation of jointly owned property
Ratio in which the tax benefit on the home loan can be claimed
It may also happen that you may be a joint owner, as well as a co-borrower but are not servicing the home loan. In such a situation, you cannot claim the tax benefits on the home loan, as the tax benefits are available with respect to the amounts paid by you.
For one self-occupied property, you can claim interest benefits upto a limit of Rs 2 lakhs, in case of each of the joint owners. For home loan repayment, each co-borrower can claim tax benefits under Section 80C, upto Rs 1.50 lakhs every year, together with other eligible items. So, you will get the tax benefits on the home loan, in the ratio in which you are servicing the home loan.
How to determine one’s share in the home loan and can this be changed?
Your share in the property is fixed at the time of purchase of the property. It may be by way of contribution towards down payment, as well as your share in the home loan. It may also happen that you may be a joint owner of the property, as well as a co-borrower in the home loan application, even when you may have fully paid for your share in the property by way of the down payment. It may so happen that your share in the property, may not be defined in the agreement for purchase of the house and your share in the home loan is also not mentioned in the loan sanction letter or the home loan certificate issued by the lender. The share in the house property can be presumed to be equal, unless there are other circumstances to warrant otherwise.
The share in the home loan can be ascertained, from the payments made by each of the joint owners. It is always advisable to prepare a Memorandum of Understanding (MoU), which need not be stamped, to clearly define the respective shares of each of the joint owners in the property, so as to avoid any problem in the future. The details of payments made by each of the joint owner may also be mentioned in the memorandum of understanding.
In case a home loan is taken for buying the property, the ratio of each borrower in the home loan, can be inferred from the share in the property and payments made. Your share in the home loan may not necessarily be in the same ratio as your ownership of the house property. As the share in the home loan is crystallised at the time of purchase of the property, the home loan should be serviced in the ratio arrived at the time of the purchase. This share in the property cannot fluctuate year after year and remains fixed. Therefore, you cannot change the pattern of servicing your home loan, any time you wish to do so.
As most people are unaware about this, they resort to changes in the pattern of servicing the loan, when one of the co-borrowers loses his/her job or takes a long leave due to pregnancy or study leave. However, this is wrong. In order to avoid any issues with the tax authorities, one should not change the pattern of servicing the home loan, once is it fixed. In case of a cash crunch, other co-borrowers can temporarily lend/gift money, so that the ratio of servicing of the home loan is maintained throughout the tenure, according to the share in the home loan.
(The author is a taxation and home finance expert, with 35 years’ experience)