Buying a house jointly can turn out to be a win-win proposition

It Takes Two To Tango

Buying a house jointly and co-borrowing a loan for the same can turn out to be a win-win proposition for both the husband and the wife, explain Preeti Kulkarni & Vidyalaxmi

WHEN a couple ties the knot — they pledge to share their lives and all the emotional and financial responsibilities that come with it together. Since buying a house is one of the biggest and most important financial responsibilities, couples invest a lot of time and efforts in ironing out the details for the location of the house, the budget, the co-ownership, down payment, home loan and so on. However, not many are clear about how the co-ownership share impacts the tax exemptions on home loans. It is imperative that no ambiguity surrounds the tax mathematics here, as the ownership of the property is the most important criterion for claiming tax benefits.
So what does a DINK (double income, no kids) couple — let’s say Sunil (35) and Nikita (33) — need to do to optimise the tax benefits on the principal amount and interest payable? If the annual incomes of Sunil and Nikita are assumed to be Rs 7 lakh and Rs 6 lakh, respectively, their taxable income would work out approximately to Rs 6 lakh and Rs 4.5 lakh, respectively.
Like most DINKs, it is likely that Sunil and Nikita will opt for a jointownership as well as joint home loan. Thus, both will be eligible to claim exemptions on the principal amount and interest payable. Taking a joint home loan offers dual advantage of minimising the debt burden and maximising the tax reliefs.
A joint home loan involves an applicant and a co-applicant. Housing finance institutions insist that the co-owners of the house have to be co-borrowers as well. However, they do not insist on the reverse. But it is essential for the co-borrowers to be co-owners in order to seek tax rebate. The tax benefits will accrue to the couple in accordance with the co-ownership share. Though there are no restrictions on the ratio of ownership, in the case of Sunil and Nikita, it’s best if they have an equal share as their individual taxable income exceeds Rs 2.5 lakh per annum and both fall under the 30% income tax bracket.
Had Nikita been bracketed under the 20% tax payable category, it would have made sense for Sunil to have had a higher share in ownership to claim a higher tax benefit. To illustrate the point, let us assume that they had jointly invested in a property of Rs 25 lakh in the ratio of 60:40; here, the tax benefits would have been shared in the proportion of 2:1.
Sunil and Nikita also have the option of coming to a mutual understanding on the share of ownership — irrespective of the actual investment — depending on who can claim the maximum tax benefit. This option can be exercised if the level of understanding between a couple is good and saving on the tax outgo is of paramount importance to them, otherwise it’s better to stick to the 50:50 ratio, or simply, the actual share in the investment/loan taken. Let’s understand this with a numerical example. Sunil and Nikita have bought an apartment for Rs 60 lakh and made a down payment of Rs 15 lakh. Now with the ownership share being in the ratio of 50:50, both will borrow Rs 22.5 lakh each. This will be over and above Rs 7.5 lakh that each of them would cough up for the down payment.
Maximum Advantage
The overall tax deduction for a single borrower is Rs 1,50,000. This deduction would apply to each borrower, which means that the total deduction would amount to Rs 3 lakh. The tax benefit will be shared in the same ratio as the ratio of the loan amount availed by the husband and wife.
Claiming Deductions
Each borrower is required to provide a copy of the borrower certificate to claim his/her respective tax relief. At the outset, the co-borrowers should enter into a simple agreement with the spouse on a Rs 100 stamp paper. This agreement should contain details of the share of the ownership along with that of the home loan availed by the couple. They would need two copies of this certificate from the HFC and each of the couple can submit copies of the certificate along with a copy of the agreement signed between them. This agreement should ensure that both spouses get their share of the deduction. Tax experts point out that there are no clear guidelines to this effect, which means that there is a chance of either of the borrower missing out on the tax rebate. In such cases, they can claim it as a refund while filing the tax returns.
The most important point to remember is that home loan companies insist that all coowners should be co-applicants for the loan as well. But it’s not necessary that co-applicants have to be co-owners of the property. But if both Sunil and Nikita want to enjoy the tax benefits on home loans, it’s mandatory that they should be co-owners of the property.
Repaying the Joint Loan
A couple cannot issue two cheques for servicing the same equated monthly instalment (EMI). An HFC cannot accept two cheques as the internal systems do not support the dual nature. One viable option is to service the EMI from a joint account of the co-borrowers. However, borrowers cannot demand two separate certificates. Instead, they can make two copies of the certificate and submit them for tax purpose. The second option is that the couple could share the number of instalments between them. For instance, eight cheques could be issued from the husband’s account while the wife could issue the balance.
Another option is that the husband can pay off the instalments and seek the reimbursement from the wife for her share. However, tax experts say this process could get highly cumbersome both for the borrowers as also the HFC.
HRA vs Housing Loan
One thing that you need to keep in mind when you decide to buy a house jointly is that you will no longer be able to claim tax benefits associated with HRA. If the level of understanding between a couple is good and they are unwilling to let go of the tax benefits, one spouse will have to sacrifice the share in ownership. You need to decide your priority — saving taxes or the co-ownership of the property. If you come to the conclusion that tax saving is indeed your priority, you can try this arrangement: You can do away with the idea of jointly owning the house and one spouse can claim the tax exemptions on the housing loan and the other can settle for house rent allowance.
Explains Vaibhav Sankla, executive director at Adroit Tax & Investment Services: “The Income Tax law does not prohibit a spouse from claiming HRA tax benefits on his/her better half’s property. But the couple has to tweak it a bit”.
He explains that in the above case, Nikita can claim a house rent allowance benefit, if she lives in the house solely owned by her husband. But in that case Sunil, who is also the landlord, will stay with Nikita in the same house.
Now, if the market-aligned rent of the house is Rs 10,000, then Nikita can claim HRA benefits only for an amount of Rs 5 lakh. On the other hand, Sunil will be taxed for the rent he earns on the flat. So it makes financial sense to let go off the house rent allowance in this case, he explains.
In today’s day and age, buying joint homes may be a wise decision. This mean higher the loan amount, bigger the house and the twin tax benefits. Of course, you need to keep in mind the possibility that the nature of the relationship might change in the future, which could impact the biggest financial investments of your life.
preeti.kulkarni@timesgroup.com