News & Views on Indian Real Estate

Monday, August 18, 2008

Apply for joint loan and get tax benefits

In case both husband and wife are working or have separate sources of income can apply for a joint loan for purchase of a house. This way, the loan eligibility and amount also increase. Under the Income Tax Act, tax benefits are available on housing loans and the interest paid on them. In case of joint loans also all the co-borrowers can get tax benefits. Co-borrowers, who are also co-owners, are eligible for tax rebate in the proportion of their share in the loan. The repayment capacity of each spouse should be taken into account while deciding on the shares of the loan. The shares may be any ratio. The tax benefits would be shared in that proportion only. One should specify the share of the property and other loan details on a stamp paper.It needs to be ensured that both should be co-owners of the property. The ownership of the co-owners of the house must be co-borrowers as well. It is essential for co-borrowers to be co-owners in order to claim the tax benefits. One cannot get tax benefits if he is just a co-borrower but not a co-owner. In case a borrower pays Rs 1 lakh as interest and Rs 25,000 as principal, in case each has an equal share in the borrowing, each can claim Rs 50,000 against interest and Rs 12,500 against principal in their respective income tax returns. Each borrower needs a copy of the borrower certificate. The borrowers should take the interest and principal certificate from the bank and each can submit copies of the certificates along with a copy of the agreement signed between them to claim tax relief. The co-borrowers should enter into a simple agreement with the spouse on a Rs 100 stamp paper. This agreement should basically contain the share of the ownership along with that of the home loan availed by the couple. If one of the co-owners does not have any income, then the other co-owner should enter into an agreement with the spouse. The agreement should state that the entire repayment is met only by one borrower's income. This would ensure that the main applicant will have 100 percent beneficial home ownership and consequently he can enjoy all tax benefits applicable to a single borrower. The repayment of the loan may be repaid from a joint bank account, where both the husband and wife share the funds. Another option, although less popular, would be to share out the EMIs between husband and wife and both pay a specified number of cheques for the loan repayment. It would need to be ensured that the repayment of the loan is made in the same ratio as the joint borrowing. Further, each of the borrowers should have a demonstrable source of income to justify the repayment of loan. The maximum tax deduction allowed for a single borrower is Rs 1.5 lakhs. This deduction would apply to each borrower. A proper record of the respective shares of borrowings needs to be maintained to prove the shares of each of the borrowers.

Vikas Bamotra said...

Here is an example of how the tax benefits will be split between a couple.

Cost of the apartment: Rs 10,00,000 (Rs 1 million)
Ownership share: 60% (husband), 40% (wife)
Loan: Rs 6,00,000

Amount to be brought in by husband: Rs 6,00,000
Less actual contribution by husband: Rs 2,00,000
Husband's share in the loan: Rs 4,00,000

Amount to be brought in by wife: Rs 4,00,000
Less actual contribution by wife: Rs 2,00,000
Wife's share in the loan: Rs 2,00,000

Interest payment: The maximum limit of Rs 150,000 on interest paid will apply individually to both (ie the total deduction will be limited to Rs 300,000).

Principal repayment: The tax benefits on the principal will be shared in the ratio of 2:1 between the husband and wife since that is the share of the loan for husband and wife. The limit is Rs 100,000 for each.

You should enter into a simple arrangement with your spouse (or the other co-borrowers) stating the shares of the loan. A suggested draft is provided here. You can do it on a stamp paper.

The bank or the home finance company is unlikely to give you a separate certificate, but you can make two copies of the certificate and submit it in your individual IT returns along with the formalised share agreement.

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