Tax Benefits for Property Co-ownership
Tax Benefits for Property Co-ownership
At times, the only way to carry a burden is to share it. This has now been proven right when purchasing a property together. There are many financial gains, such as saving on tax payments when a property is owned this way. However, to take advantage of all the benefits of co-owning a property, it is essential to make a completely informed decision. In this article, we take a more in-depth look at the Tax Benefits for Property Co-ownership in India.
Co-owner and Co-borrower
Under Section 26 of the Income Tax Act states that when two or more persons own property while their respective shares are definite and ascertainable, such individual persons will not be assessed as an Association of Persons (AOP). However, they would be evaluated as an individual person, and the shares of such individuals and their income from the property shall be estimated according to the provisions prescribed in Section 22 and Section 25 of the Income Tax Act of 1961.
Who is a Co-owner?
Persons who have signed a property agreement jointly are known as co-owners. They should have their names mentioned in the property papers as the owners of the said property. It is essential that they contribute towards the purchase of the property as well. Co-owner may be parents, a spouse, children or even a sibling.
Who is a Co-borrower?
It is essential that co-owners be co-borrowers/ co-applicants of the property loan. Their names must be mentioned in the loan agreement. It should be noted that owners of the property who are not co-borrowers nor pay the EMI as well, would be ineligible for any tax benefits. A person is devoid of any tax benefits from the property if they do not contribute to the EMI payments, even if they are a co-owner/ co-borrower.
Types of Co-ownership
The following are the types of co-ownership when it comes to property.
When two or more individuals hold the ownership of the property, and their shares are not explicitly mentioned, it is called Tenants-in-Common. In such purchase, every co-owner is considered as equal partners, and each one of them may own the property in its entirety. In the case of death of a co-owner, the interest will not be passed on to the other co-owner(s) but to whoever is mentioned in the will of the deceased. That individual will then be a tenant-in-common with the other co-owners of the property.
This kind of co-ownership permits the interest of a deceased co-owner to be passed on to the other joint-owners of the property.
Advantages of Co-ownership
There are numerous benefits to having a co-ownership in the property. To avail all the tax benefits, one must meet the eligibility conditions and understand all the tax provisions given by the IT Department. Being a co-owner alone isn’t enough; one must also be a co-applicant of the loan. The following are the advantages of co-ownership of property excluding tax benefits.
Co-ownership comes as a huge advantage when it comes to home loans and their chances of being sanctioned by the bank. The bank would consider the combination of all the incomes of the applicants to make a decision if there is more than a single applicant for the loan. Therefore, the chances of getting the loan sanctioned are higher.
Repayment of Loan
When the number of co-owners is more, it is easier to repay the loan as the burden of EMIs are equally split amongst all the co-owners/ partners. Therefore, it is highly advisable for working married couple to purchase properties as co-owners.
Spouses may apply for a property loan jointly. The burden of that loan is equally divided amongst the two individuals, making it easier for the repayment. Moreover, tax benefits may be availed by them, which in turn, benefits their family.
In some states, the stamp duty charged for women is lesser than the usual rate by 1-2%. As a result, it is always encouraged for spouses to purchase a property together.
When it comes to single ownership, succession may turn out to be a tedious process. On the other hand, if one spouse passes away in joint ownership, the property automatically goes to the remaining co-owner.
Even though the advantages outweigh the disadvantages, it should be mentioned nevertheless.
One of the main disadvantages of co-owning a property is the extensive documentation that comes along with the same. It should be noted that the process has to be repeated twice or thrice depending on the number of applicants who want to co-own a single property.
As the co-owners of a single property has a joint liability of payment towards the property loan, if either of the co-owners default, it will reflect in the credit score and history of every joint owner.
Tax Benefits of Co-ownership
The following are the tax benefits of co-owning property.
Joint Home Loans
Most people prefer opting for a home loan to purchase a property. It is always recommended to register for a home loan jointly, in order to reap the benefits of co-ownership of a property. If done right, every co-owner of a property can claim deductions on stamp duties, and registration charges, interest and principal repayment amount individually.
However, the co-owner of the property must be a co-applicant or a co-borrower of the property loan. In such a case, the co-owners may individually claim a deduction of INR 2 Lakhs under Section 24(B) for the interest paid on loan. The share of interest that is to be paid by a partner will be estimated as per their share in the purchase of the said property. However, the combined deduction availed by all the partners must not exceed the total interest obligation for that year. It should also be noted that a deduction on the principal payments of the property loan, including the registration charges and stamp duty is applicable to each co-owner within the overall limit of INR 1.5 Lakhs under Section 80C. These deductions must be claimed in the ratio of the share in the ownership of the said property.
Section 80EE was re-introduced by the Income Tax Department in order to lower groups to take a home loan. First-time home buyers, single-handed may claim an amount of INR 50,000 or jointly, under Section 80EE. However, it should be noted that this Section is applicable to individual taxpayers such as HUFs, AOPs, and so on, only. The deduction may be availed over and above the benefits of Section 24(b) and Section 80C. However, if one wants to claim these deductions, they are required to satisfy the conditions mentioned below.
- Value of the property bought should not exceed INR 50 lakhs.
- Loan taken for the property should not exceed INR 35 lakhs.
- The loan should be availed from a financial institution/ housing finance company.
- The loan should be sanctioned between the 1st of April, 2016 and the 31st of March, 2017.
- On the date of sanctioning the loan, the individual should not own any other property.
Rent Earned for Co-owned Properties
A 30% deduction under Section 24 is applicable to the rent obtained from the property in order to estimate the annual value. This deduction is applicable to co-owners of a property. The income earned as rent is to be equally split as per the ratio of ownership and the deduction is estimated accordingly.
Capital Gains from Co-owned Property
When a property that is co-owned is being sold off, the co-owners must ensure to declare their capital gains from the sale. The capital gains from the sale of the property are adjusted amongst the co-owners depending on their share of ownership. Moreover, the exemption under Section 54 is applicable if the capital gains from the sale are invested in another property purchase/ construction. Additionally, each co-owner could claim a deduction of maximum INR 50 Lakhs under Section 54EC if the capital gains from the sale are directed to an investment in specified bonds.
The deductions under Section 54F is also applicable for co-owners. Therefore, the purchase of a property is limited to just one. The condition of owning not more than one property is considered individually for each co-owner for this Section.