Many home loan borrowers consider taking a Joint Home Loan as a practical option to get higher loan amount and also to avail Income Tax Benefits. Joint Debt has become a part of the Household finance these days.
One of the primary benefits of a joint loan is that it increases the borrowing capacity of the prospective home buyers. The combined repaying power of the applicants(two or more) is considered while sanctioning a higher loan amount.
A joint home loan not only allows you to share your debt burden but also allows you to extract maximum benefits offered by the IT Act.
As per the existing Income Tax Laws, both the individuals (loan applicants) can claim income tax deductions on the principal repayment under section 80c and on the interest amount under Section 24. The maximum amount that can be claimed as tax deduction depends on the use of the property ie whether it is a ‘Self occupied property’ or a ‘Let-out property’.
What is a Joint Home Loan? – A joint home loan is a loan which is taken by more than one person.
Who is a co-borrower? – A Co-borrower is a person with whom you take the home loan jointly.
Who is a co-owner? – A Co-Owner is an individual that shares ownership in an asset with another individual / group.
Joint Home Loan & Eligibility rules / Conditions
- Generally a Joint Home Loan can be taken by a maximum of SIX persons (minimum being two applicants).
- A co-borrower (loan applicant) may or may not be the co-owner of the property. But, banks may usually recommend a co-borrower to also be a co-owner of the property. Do note that, being a co-borrower for a house does not automatically make one a co-owner.
- Repayment of a joint home loan is the collective responsibility of both the borrower and co-borrower(s) and each of them is liable for the loan.
- If the loan applicants are married couples then it is a perfect arrangement for home loan providers. The couple is at liberty to decide if they want to be co-owners or if only one of them wants to be a co-borrower.
- If the loan applicants are Father & son or Father & unmarried daughter then Lenders generally insists on the son / daughter being the Primary Owner of the property. (This can be applicable when Mother & unmarried daughter are the borrowers)
- If the loan applicants are ‘brothers’ then banks insists on they being the co-owners of the property.
- Generally, friends or unmarried couples living together are not allowed to take joint housing loans.
Joint Home Loan & Income Tax Benefits
- Section 80c – As per this section, the repayment of principal amount of up to Rs 1.5 Lakh can be claimed as tax deduction by the applicants individually. All the co-borrowers can avail tax benefits. If there are two co-borrowers then the maximum total tax deduction under Section 80c can be up to Rs 3 Lakh (subject to actual principal repayment amount).
Example : Where the husband and wife as co-borrowers are paying a total of Rs 1 Lakh as Principal element of the home loan EMI, each of them can avail tax exemption of Rs 50,000 individually.
- Section 24 – As per this section, the interest payment of up to Rs 2 Lakh (for Self occupied property) can be claimed by the home loan borrowers. If there are two co-borrowers then the maximum total tax deduction under Section 80c can be up to Rs 4 Lakh. (The maximum interest amount that can be claimed as tax deduction u/s 24 is unlimited for a Let-out property).
Example: Where the husband and wife as co-borrowers are paying a total of say Rs 2.5 Lakh as Interest element of the home loan EMI, each of them can avail tax exemption of Rs 1,25,000 individually (assuming the share in the home loan as 50:50)
- Ownership -To avail the income tax benefits on a Joint Home loan, the co-borrower of the loan has to be the co-owner of the property. So, if you are a co-borrower but not a co-owner of your property then you can not avail the income tax benefits. (Co-ownership is mandatory to avail income tax benefits. So, if you and your spouse are co-borrowers for a property owned by another family member then you are not eligible to claim any tax benefits, as you don’t own the property.)
- Ownership Share – The share in tax exemption that each co-borrower gets is in proportion to the ratio of ownership in the property. Therefore, it is advisable for joint owners to procure an ownership sharing agreement stating the ownership proportion on a stamp paper as legal proof of the ownership.
- Highest tax bracket: The tax benefits are applicable in ratio of ownership in the property and therefore the ownership of property should be carefully decided keeping in mind the re-payment capacity of both the borrowers. A co-borrower who is earning well and is in the higher income tax slab rate can opt for higher share in ownership / Loan EMI.
Example : Santosh & Sahya (husband & wife), both are independent salaried individuals. Sahya is in higher income tax slab rate when compared to Santosh. They acquire a home loan of Rs 50 Lakh @ 10% for a tenure of 20 years. The EMI on this home loan is Rs 48,251. As Sahya is in higher tax bracket, they decide to have 60:40 ownership ratio. Sahya wants to pay 60% of the EMI amount to take the maximum benefit of tax savings.
- Liability: All co-borrowers are jointly and severally liable to repay the loan. So, it is prudent to consider entering into an agreement about the splitting of loan liability with other co-borrower(s) to avoid any clashes in future.
- Insurance: It is advisable that all the borrowers should take separate Term insurance plans(better to avoid Mortgage insurance) to mitigate the financial burden on one spouse / co-borrower in case of other’s demise. This way he /she can get the best out of the tax savings.
- Unfortunate Events: In case of divorce or a co-borrower files for insolvency or a co-borrower passes away, it becomes co-borrowers’ responsibility to pay the entire loan. The repayment record of a joint home loan reflects in the credit score of all co-borrowers. So, in the event of any unfortunate incident, it is advisable to identify an alternate co-borrower (if it is not possible to convert a joint home loan to a single loan).