Joint ownership of a house property has additional tax benefits

Buying a house property is everyone’s dream. There are various income tax benefits available to the individual in relation to the house property. But if the property is bought jointly with your spouse or parents or relatives or friends, each co-owner can enjoy the tax benefits.

Tax benefits to each co-owner on let-out property  

If the property is let out, the owner of the property has to pay tax on the rent received as per the Income Tax Act. In addition, if the property is purchased by taking a home loan, then the owner can claim the deduction for interest paid on the let-out property. However, the loss from the house property to be adjusted against other income is restricted to Rs 2 lakhs per financial year. And any loss above Rs 2 lakh shall be carried forward to future years. 

However, if there are co-owners of the property, then rental income from such house property shall be divided into the ratio of the shares of their co-owners, and each co-owner will pay tax on their share of income. For example, consider Mr X and Mrs Y are co-owners of a house property with a 50:50 share. And monthly rent received from the said property is Rs 30,000. Then Mr X and Mrs Y can divide the rental income to Rs 15,000 each in their ITR. 

Also, if Mr X and Mrs Y jointly repay the loan on the said property, then both can adjust the loss of interest paid up to Rs 2 lakh separately against the other income. Hence, during the initial years of loan repayment, where the interest component is too high, it will be beneficial if the maximum interest component is utilised against the other income to reduce the tax liability. In jointly owned properties, all the co-owners will set off a loss of Rs 2 lakh individually against other heads of income. 

Tax benefits to each co-owner on self-occupied property

Similarly, if a property is self-occupied, the owner can claim the deduction for interest paid on a home loan for up to Rs 2 lakh. Hence, if the property is jointly purchased and all the co-owners repay the loan, each co-owner would be able to claim the deduction of their respective share of interest paid up to Rs 2 lakh in the same financial year. 

Tax benefits on capital gains on the sale of the house property

As per the Income Tax Act, the seller of the property is liable to pay tax on the capital gains from the sale of house property. But as per Section 54, if the seller of the house property purchases another residential house within the specified timelines, the seller can adjust the amount invested in the new house property with the capital gains. The tax shall be paid on the balance amount of capital gains. If all the capital gain is invested in the new house property, there will be no tax on the capital gain.

Also, if the taxpayer does not want to purchase a residential house property, he can invest the capital gains into bonds specified under Section 54EC. However, one can claim a deduction of up to Rs 50 lakh from the capital gains. If the capital gain exceeds Rs 50 lakh, the balance capital gain will be taxable.

So, if the property is jointly owned, then the capital gains shall be calculated for each co-owner separately. And each co-owner can invest their portion of the capital gains amount for the purchase of a residential property or purchase of bonds specified under Section 54EC. 

Where the capital gain amount is higher than Rs 50 lakhs, the taxpayer cannot avail of full exemption from tax because of the restriction of Rs 50 lakh for investment in the specified bonds. Hence, if the property is jointly owned, each co-owner can claim the deduction of Rs 50 lakh separately on such investments and restrict the amount of capital gains to be taxed.

Points to remember

However, one must note that the above tax benefit is available only if each co-owner has purchased or funded the house property. Also, the share of each co-owner is definite and ascertainable. 

For any clarifications/feedback on the topic, please contact the writer at  namita.shah@cleartax.in