-David Walker, Managing Director, SARE Homes
It takes two to build a happy home! Joint investment in real estate increases the amount you can borrow and also helps you reap solid tax benefits.
Buying a home is one of the most important and largest financial decisions that most people make in their lives. In addition to the joy, the independence of owning your own home, it also represents a great investment. For most people the family home is the single most important creator and store of wealth. Therefore investment in a home should be made at the earliest practical time. The key features that make buying a home a great investment are as follows:
- Rapid urbanization: good employment opportunities with huge demand for family homes
- Home prices are stable and increase with rising income, which is faster than inflation and so this helps create wealth
- Loans are available on houses, which means that you get an asset that can be five times your current earnings. The full value of the asset appreciates whilst the loan gets paid off over time leaving you with a substantial capital asset.
- Significant tax benefits are available on the purchase and loans for housing which help reduce your effective cost of acquisition.
- The most important of all: tax benefits. There are a lot of benefits for families opting for joint home loans:
- The income of both applicants is taken into consideration for establishing the loan and so you can get a higher loan amount.
- Most deductions are available to both the applicants so you get an effective doubling of tax benefits.
The main tax benefits are: Deduction of interest, part deduction on principal repayment, deduction on stamp duty and registration charges and deduction on pre-construction interest.
In order to claim these benefits, both co-applicants need to be joint owners of the property. Although a couple may have taken the home loan jointly, this does not necessarily make them joint owners, without which the tax benefits cannot be availed by the partner who is not a joint owner. The property documents also should mention clearly that both co-applicants as owners. For example, a father and son may take a loan jointly, but the EMIs are paid only by the offspring. If the son is not a co-owner of the property despite paying the EMIs himself, he will be unable to claim tax benefits on this home loan. In this case, the son needs to be a co-owner of the property and a co-borrower to claim IT deductions.
If these conditions are met, the tax benefits available are as under:
Each co-owner (and co-applicant in the loan) can claim a maximum deduction of Rs. 200,000 towards interest on the home loan while filing IT returns. But the property should be the only property owned by them and should be self-occupied or lying vacant. For any property given out on rent, the entire interest component can be claimed as deduction.
Each of the co-owners can claim a deduction, subject to a maximum Rs. 150,000 towards repayment of principal amount under section 80C.
In other words, a family gains a larger tax benefit against the interest paid on the home loan when the property is owned jointly and the interest paid is more than Rs. 2,00,000 annually. For example, if the interest component of a joint loan is Rs. 5,00,000, a single borrower can only claim deduction of Rs. 2,00,000 while joint borrowers can both claim the same amount, leading to a total deduction of Rs. 4,00,000. This is an excellent way to augment annual household savings or investments. But do note that tax benefit for both the deduction on home loan interest and principal repayment can only be claimed under section 80C after the construction of the property is completed and possession has been taken, not before. The joint owners can also claim the stamp duty and registration charges paid for the property.
With respect to the joint home owner’s aspect, it’s important that the share of rights in the property should be clearly mentioned in the registration papers. The division of interest will then be claimed in the same proportion in the asset as is owned by each co-applicant. To elaborate, if the ownership ratio of the flat is 75:25 and the loan amount is Rs. 1 crore, the split will be Rs. 75 lakh and Rs. 25 lakh, respectively. The tax benefit on the interest will then be claimed as per the loan amount of each co-applicant. This can be confusing at times in making joint payments. In which case, it is best to deposit the individual amount of the EMI into a joint bank account every month and thereafter make the payment.
Besides the above benefits, through a joint home loan one can also avail of a higher loan amount. This is possible because the bank takes into account the net monthly income of both co-borrowers and then decides on the loan amount available, which is much higher.
But there are a couple of disadvantages too in taking a joint home loan. When there are two co-applicants (or more than two in some cases), the bank or housing finance company will take longer in completing the documentation process. While the joint home loan allows one or both co-applicants to repay the loan, in case one of the paying partners defaults, the credit history of both applicants is tainted. It is therefore important that both partners ensure there is no default in repaying the loan.
Thus, proper due diligence must be done before making an investment or involving your partner in a joint home loan. Make sure you’re buying the home in the best location, within budget and from a reputable developer who will deliver what he has promised. Buying a home is like a solid lifetime investment, it brings joy and independence to you and your family. Other than that, taking a joint home loan is a good strategy as it increases the amount you can borrow and also increases the tax benefits you can claim against your income tax.