In the last article, (All about housing loan tax benefits) I have explained the various income tax benefits that a home loan comes with. This article is a part 2 of the series where I will explain as to how one can increase the quantum of income tax benefits by taking a joint home loan and the various advantages and disadvantages of taking joint home loan.As far as basic tax benefits are concerned it is same in every home loan like tax benefit under section 80c of principal payment and tax benefit under section 24 of interest payment. But the treatment and applicability of these benefits differs in joint home loan and loan for second home.
What is joint home loan?
A home loan where there is more than one borrower termed as joint home loan. These co borrowers can be spouses, parents, children etc. Co borrowers in joint home loan have to be in blood relation. No two friends can be co borrowers. In fact banks sometimes avoid giving loan to siblings unless they are co-owners in the property. This also happens in the case where loan is taken with parents as co borrowers. It is only in the case of spouses where banks don’t demand the co ownership on the said property of co borrowers.
Having a joint home loan is advantageous when both the co borrowers are tax payers. But do keep in mind that to claim income tax benefits in joint home loan all the co borrowers should be the co-owners . Tax benefits can be claimed in the same ratio as the loan taken by co owners.
A co-owner who is not a co borrower is not entitled to income tax benefits. Similarly a co borrower who is not a co-owner cannot claim tax benefits. Below are few examples which will make this concept clear.
Flat value – Rs 75 lakhs
Loan amount – Rs 60 lakh
EMI for 20 years @ 10% p.a (reducing) – Rs 57901/- p.m
(Please note that from FY 2014-15 , Section 80C benefit has been raised to Rs 1.5 lakh and Section 24 benefit has been raised to Rs 2 lakh, as per finance bill 2014)
Case 1 – Husband (H) and Wife (W), both are working and tax payers. H purchases a flat in his own name and to manage the burden of EMI, takes home loan with W as a co borrower. In this case though W is the co-borrower and contributes in the EMI, still she would not be eligible to claim any tax benefit u/s 80C or section 24. i.e. in all years only H can claim up to Rs 1.50 lakh in interest payment and 100% of principal or Rs 1 lakh whichever is less.
Case 2 - H and W, both purchases a house with co ownership of 50:50 and also took home loan jointly in the same proportion. In this case both H and W can claim the income tax benefit of Section 80C and section 24 in equal proportion. i.e The complete interest payment and principal will be divided equally in H &W and both can claim separately Rs 1.50 lakh u/s 24 and Rs 1 lakh or 50% of principal whichever is less
Case 3 – H and W both purchase a house with a co ownership of 75:25 and also took home loan jointly in the ratio of 50:50. In this case both H and W can claim income tax benefit of section 80C and Section 24 in the ratio of borrowing. i.e The interest and principal payment will be divided in the ratio of 50:50 and both H&W can claim income tax benefit in this ratio only, up to the maximum limit allowed.
Please note that in all the above cases the tax benefits that have discussed are on self-occupied house. In case of let out or deemed to be let out house ,No principal payment but 100% of interest payment can be claimed under section 24 by both the co owners in the ratio of their borrowing.
Advantages of having a Joint home loan
- One major advantage is the income tax benefit that gets divided in co-owners.
- Second advantage is the increases in chances of getting loan and also increase in the loan eligibility.
Disadvantages of having Joint home loan
1. As explained in the article (housing loan tax benefits), that self-occupied property is the one which is occupied by the owner for self-residence, and if there’s any other property purchased will be treated as “Deemed to let out” and taxed accordingly. So in case of joint home ownership, if any of the co-owner purchases some other property in the same city will be treated as “deemed to let out”.
2. If any of the co borrowers has bad credit behaviour due to which repayment of home loan goes irregular, this will affect the credit score of other co borrower too.
3. If due to any dispute, any of the co borrowers refuses to repay the loan, please be warned that as per loan schedule the liability to repay the loan is joint and several on the part of each co borrower. This means all the co borrowers are liable to pay up to as much as all repayments. Lender may also sue both the co applicants to recover the dues.
4. We all are emotional beings. Under the lure of getting access to high credit eligibility which may help in buying a big house, we tend to forget how the EMI burden will going to affect the other goals. (Also Read: Brace yourself for house purchase)
Though Banks provides loans to spouses with no compulsion on having co ownership, it is advisable for both spouses to have some ownership. Before becoming a co applicant make sure that you have some percentage of ownership in the property. Also, if you are co borrower, you could perhaps draw up and sign an agreement with your spouse on splitting the liability. This is to avoid any dispute in future.
Hope you have understood that where joint home loan brings income tax benefits along with, it has to be used with caution and proper financial planning, to tackle any issue later in life.
Do share your views on Income tax and other benefits on joint home loan. What do you think, is it advisable to have joint home loan?