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Lessons: Tax Savings on a Joint Loan

 

To get the best out of the tax savings, it is good to let the partner with the higher pay make a higher contribution towards the home loan resulting in a better tax benefit collectively. In any case as both Niranjan and Chitra are earning, other expenses can be manged with the income of the person making a lesser share towards the loan. This would help you optimize the benefits from the tax exemption on principal and interest repaid.

Niranjan and Chitra want to buy a home soon. They are very excited about the falling property prices, reducing home loan interest rates and have already started planning out the details of going about their dream home hunt. Keeping their research updated on the home loan front was also a key aspect of the entire exercise.

They were aware that a home loan would mean tightening their budgets and cost cutting on several fronts to help them meet the demands. After much thought they decided to choose a joint home loan. This article explores the advantages, a joint home loan can bring to Niranjan and Chitra as opposed to opting for an individual loan.

a. The most significant advantage of a joint home loan is the increase in home loan eligibility. Incomes from all joint home applicants are pooled in to enable the applicants obtain a higher loan amount towards purchasing their dream home.

b. All the joint home applicants are eligible for tax rebates under Section 80 C for principal repaid and under Section 24 for interest repaid. However, these tax deductions are capped at 1 L for the principal repaid and 1.5 L for the interest repaid. Another advantage of jointly taking a home loan is that all the borrowers can simultaneously avail these income tax rebates, thus maximizing the tax benefits on the home loan.
Loan eligibility

Generally, as a safe lending practice, banks do not allow a person to borrow to an extent, where their EMI exceeds more than around 40-50% of their monthly income. This ensures that there is no undue stress on an individual’s monthly budget. Therefore to increase your loan eligibility it makes money sense to club your income with your spouse or parent for availing a higher loan amount that will meet your needs. For Niranjan and Chitra this is an ideal option.

Let us find out how much Niranjan and Chitra are eligible for when they combine their incomes.

Niranjan and Chitra earn a gross annual income of R.6L and Rs.4L respectively, which provides them a combined income of Rs10L.

Let’s say Niranjan opts for a home loan worth Rs.20L, which works out to an EMI of around Rs.20,000, which is 40% of his monthly income. If he combines his income with Chitra, he can ensure that there is less stress on his budget and this will also retain the possibility of adding on a couple of lakhs more if the need arises, when they actually shortlist the property they wish to buy and approach their chosen bank for a loan. You can calculate the EMI for your loan here.

Tax benefits

The tax benefits for loan repayments will be split in the ratio of the share in the home loan.

Let us try and understand how the couple can avail tax rebates according to the ratio in which they are split up. Let us assume the cost of the couple’s dream home amounts to Rs.25L. The couple collectively manage a downpayment of Rs.5 L utilizing their savings and take a joint home loan worth Rs.20L.

Share in repaying the interest component of the loan: The specifications of Section 24 and related Sections 26 and 23 suggest that both Niranjan and Chitra are individually eligible for a tax rebate on interest repaid, which amounts to a total of Rs.3 L deduction for every financial year for the duration of the home loan for a self-occupied property.

Share in repaying the principal part of the loan: Each of them are eligible for a tax rebate of Rs.1 L from their respective individual shares of the principal component for every financial year for the duration of the home loan for a self-occupied property.

Let us take a look at the break up of the taxable income slabs to enable us to get down to calculating tax saved.

 

Here are the current tax slabs for the financial year 2008-09:

 

Tax Slab up to Rs. 1,50,000
Up to Rs. 1,80,000 (for women)
Up to Rs. 2,25,000 (for residents, 65 years or above) Nil

 

Rs. 1,50,000 - Rs. 3,00,000 10%

 

Rs. 3,00,001 - Rs. 5,00,000 20%

 

Rs. 5,00,001 - Rs. 10,00,000 30%

 

Above Rs. 10,00,001 - 30% + 10% surcharge on tax

 

Also, an education cess of 3% is charged on the entire tax amount including surcharge.

 

Let us build our example with the following figures:

 
Loan amount = 20 L, Loan tenure = 20 yrs, Interest rate =10%
Year 1 - EMI - Rs.19,300 ; Interest = Rs.198,510 ; Principal = Rs.33,905
 

Here we take into account 3 different scenarios:

 

Scenario 1 - How much tax will Niranjan and Chitra pay if they take an individual home loan?

 

Scenario 2 - How much tax will they pay if they do not take a home loan or make any other investment?

 

Scenario 3 - How much tax will they save if they take a joint home loan with the split between Niranjan and Chitra to the tune of 70% and 30% respectively during the first year of the home loan.

 

Tax Calculations for the couple
To get the best out of the tax savings as seen with the above example, it is good to let the partner with the higher pay make a higher contribution towards the home loan resulting in a better tax benefit collectively. In any case as both Niranjan and Chitra are earning, other expenses can be manged with the income of the person making a lesser share towards the loan. This would help you optimize the benefits from the tax exemption on principal and interest repaid.

Please note that tax slabs might change according to new budget specifications each year and there could be changes in the gross income as well, not to mention changes in the total principal and interest repaid in every new year of the home loan. In this respect, the interest repaid will become considerably lesser and the principal repaid will become higher during the latter years of the loan.

For tax purposes, it is best to procure a home sharing agreement, detailing the ownership proportion in a stamp paper, as legal proof for ownership.

So taking a joint home loan has the significant twin benefit of increasing your loan eligibility and maximizing your tax rebate. There is one rule banks insist on when you apply for a joint home loan, which is that all co-owners of the property should also be co-applicants but the reverse need not be true.

 

Source: Bank Bazaar

By vayaM CS