The Indian government allows tax benefits to residents with house property. These benefits are also extended to those who own residential properties jointly. If you are planning to purchase a house, buying one with your spouse, parent, relative or friend could not only cut prices but help you receive additional tax benefits at a lesser cost.
Here are some of the tax benefits of joint-ownership:
Home loan interest
The Income Tax Act allows the taxpayers to claim a deduction on the interest paid on a home loan under "Income from House Property."
In case of a self-occupied house, one can claim a deduction on interest paid up to Rs 2 lakh per financial year. This advantage multiplies when the house is jointly owned as each owner gets to claim a Rs 2 lakh per financial year individually.
This is especially beneficial in the initial years when the interest amount is high and one cannot claim the deduction to the fullest extent due to the limit.
Loss on house property
As a taxpayer, you should be aware that the income of an individual is computed under 5 titles for income tax purposes and any loss during the year will be deducted against the income within the same category. In case of house property, suppose the rent earned from letting out the house (income under the section) is less than the interest paid on the home loan, a 'loss on house property' arises.
This loss can be written off against other heads of income to the extent of Rs 2 lakh per financial year only. Anything in excess can be carried forward to the extent of 8 subsequent financial years.
In case of joint ownership, just like in the case of interest income, the co-owners have the opportunity to write off the loss to the extent of Rs 2 lakh, helping the owners claim a bigger deduction for the financial year. Note that the rental income will be divided among the owners.
Capital gains on sale of house- used to buy another house
When a house is sold in India, the proceeds from the sale are considered as 'capital gains from house property' and are taxable. However, section 54 under the Income Tax Act allows the individuals to claim tax exemption on the gains when used to purchase another residential property within the stipulated time and to the extent of the price of the new house.
Suppose the house was jointly owned by two people, the gains would also be split into two and will restrict the tax implications to the extent of the share. Both the owners can also use the proceeds to buy one house each to further restrict the taxable capital gain.
Note that the benefit was extended to purchase two houses instead of one in the Budget 2019 for a long term capital gain up to the extent of Rs 2 crore. Further, this benefit can only be used once in the lifetime by the taxpayer.
Capital gains on sale of house- used to invest in specified bonds
Suppose one does not want to use their proceeds from the sale of a house to buy another, section 54EC of the Income Tax Act allows the individuals to invest in some specified governmental bonds like those offered by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).
The deduction on this investment is restricted to the extent of Rs 50 lakh only. Considering the high real estate rates in some of the Indian cities, the proceeds will exceed Rs 50 lakh. In case of jointly owned properties, each owner can separately avail the Rs 50 lakh deduction.
Note: In case of joint-ownership it is required that the house is funded by each co-owner and the shares of the co-owners are defined. Tax benefits under joint-ownership are highly scrutinized especially when one of the owners falls under a lower income tax bracket.