Taxpayers can purchase a residential property subject to joint ownership for several reasons. One such reason can be co-inheritance. Several benefits are available in the Income-Tax Act for jointly owned properties.
Details of tax benefits offered
1) Principal and interest repayment
- a) Self-occupied houses
Taxpayers may buy a house for themselves (self-occupy) by taking housing loan from a financial institution or a bank. Such a loan requires borrowers to repay it along with a certain interest rate. In case of a joint loan, each borrower can get tax benefits listed below:
A cumulative benefit of up to Rs 3.5 lakh can be availed per financial year per co-borrower.
Taxpayers must request for annual housing loan interest certificate from their banks or financial institutions in order to enjoy the above benefits. These deductions are available from the financial year in which the property construction is completed.
Tax deductions for interest payments made during under construction period can be claimed once it is completed. The entire pre-construction interest can be claimed 1/5th for each financial year beginning from the year of completion of construction. However, an overall limit of Rs 2 lakh per annum is applicable. In contrast, the principal repayment done during the period of construction is not eligible for a tax deduction.
The deduction is available only if the property construction is completed within a period of five years from the financial year in which the loan was taken. Otherwise, the tax deduction available on the annual interest payment gets reduced from Rs 2 lakh to Rs 30,000.
- b) Let out houses
It is possible to get tax deductions even if the residential property bought by joint owners is let out. In this case, each of joint owners is taxed based on the rental income proportionate to their respective share in the property. The joint owners must submit their annual housing loan certificate to claim deductions via employer or keep it safely while filing their returns, should the assessing officer ask for it.
Each of joint owners can claim a deduction for the interest they pay towards the housing loan against the rental income. In cases where the rental income is lesser than the interest paid, each co-owner can carry forward a loss of up to Rs 2 lakh.
Also, each co-owner can claim an overall deduction of up to Rs 1.5 lakh per annum on the principal repayment of the housing loan, stamp duty charges and registration fees.
2) Reinvestment on a residential property
Joint owners of a house can get capital gains exemption when they sell the property and buy a new house according to Section 54 of the Indian tax law. The exemption is calculated based on the amount of capital gain that is reinvested in purchasing a new house. The maximum exemption available can be the capital gains or the purchase cost of the new house, whichever is lower.
Each of co-owners can compute their individual capital gains and invest in a new house to reduce the amount payable under capital gains tax. To be eligible for such an exemption, the co-owners must have held the property for a minimum period of two years.
Latest update: During the financial year 2019-20, taxpayers can get an exemption for up to 2 residential properties for transfers made after April 1, 2019. However, the total capital gains cannot exceed Rs 2 crore in this case.
3) Investment on specified bonds
Joint house owners can also get capital gains exemption when they sell a house and invest the capital gains in specified bonds. These bonds are issued by Rural Electrification Corporation Limited (REC) and National Highways Authority of India (NHAI). The exemption is offered under Section 54EC of the Indian tax law.
The tax exemption available in this category is equivalent to capital gains or the purchase cost of the specified bonds, whichever is lower. A maximum amount of Rs 50 lakh per co-owner is considered for tax exemption. On a whole, a maximum of Rs 1 crore of the capital gains can be saved on the sale of a house.
Joint owners who have held a residential property for a minimum of two years are eligible to get the capital gains exemption.
Joint house owners can save on income tax payment as the government offers several tax deduction options.
(The author is co-founder and CEO, ClearTax)