Tax Benefits for Home Loan Applicants: Strategies for Co-Borrowers

Nov 06, 2023
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Home loan applicants have a unique advantage when it comes to tax benefits. Not only do they share the financial burden of purchasing a home, but they also share in the tax benefits that come with it. A home loan, where two or more people co-borrow the loan amount, can offer several tax benefits that individual home buyers cannot avail. Let?s take a look at some tax benefits on home loan for applicants.

1) Increased Tax Deduction limit:

One of the biggest advantages of a housing loan is an increased tax deduction limit. As per the income tax laws, an individual is allowed to claim a maximum tax deduction of Rs. 2 lakhs on the interest paid on a home loan in a financial year. However, in the case of home loan applicants, each individual can claim a tax deduction of up to Rs. 2 lakhs, resulting in a total deduction of up to Rs. 4 lakhs.

2) Sharing of Tax Benefits:

In a home loan, each co-borrower can share the tax deduction benefits in a proportionate manner. This means that the tax deduction benefits will be split between the co-applicants based on their contribution to the loan repayment. For example, if one co-applicant pays 60% of the loan EMI, they will be eligible for a tax deduction on 60% of the interest paid on the home loan.

3) Higher Loan Eligibility:

Home loan applicants enjoy higher loan eligibility and can avail a higher loan amount as compared to individual applicants. This is because the income of all co-applicants is considered while calculating the loan eligibility. The combined income of all co-applicants can help in securing a larger loan amount, which can be beneficial when purchasing a high-value property.

4) Capital Gains Tax Benefits:

In the case of a home loan, the co-applicants can claim capital gains tax benefits while selling the property. If the co-applicants sell the property jointly, they can each claim the capital gains tax exemption up to Rs. 2 crore under Section 54 of the Income Tax Act 1961. This exemption can be claimed every two years, making it a significant tax benefit for home loan applicants.

5) Co-Owned Property Tax Benefits:

When a property is co-owned by two or more individuals, they can claim tax benefits based on the proportion of their ownership. For example, if two co-owners in a property own 50% each, they can claim tax deductions on the interest and principal paid on the home loan in the same proportion. This can result in significant tax savings for each co-owner, and they can claim the benefits in the same proportion for up to 2 years. Now that we have looked at some tax benefits of a home loan let?s explore some strategies for co-borrowers to maximize their tax benefits.

1) Optimum Home Loan Repayment Ratio:

It is essential to decide on an optimum home loan repayment ratio between co-borrowers to maximize tax benefits. Ideally, this ratio should be decided based on the income levels of each co-borrower. The home loan repayment ratio can also be adjusted based on the percentage of ownership of each applicant in the property.

2) Timely Disbursement of Loan and Registration of Property:

The tax benefits on home loans for applicants will commence from the time of disbursal of the loan and registration of the property. It is important to ensure that these events happen in the same financial year to make the most of the tax benefits as the interest paid on the loan in the same financial year is eligible for tax benefits.

3) Joint Registration of Property:

When a property is registered jointly, it allows each co-borrower to claim their share of the tax deduction benefits. Joint registration of property can also help in avoiding disputes and legal issues in case of unforeseen events like divorce or death of one of the co-owners.

4) Avoid Delay in Loan Repayment:

Co-borrowers should avoid delay in loan repayment as interest on delayed payment is not eligible for tax benefits. To ensure maximum benefits, they should make sure that the loan is repaid on time each month.

5) Keep Accurate Records of Loan Repayment:

Accurate records of loan repayment should be maintained by each co-borrower. This includes the total amount of interest paid on the home loan, the principal repaid, and the EMI payable every month. These records will be required while filing income tax returns and claiming tax benefits.

Conclusion

In conclusion, a home loan can offer many tax benefits that individual home buyers cannot avail. Co-borrowers must keep in mind the above strategies to make the most of these benefits. It is essential to plan the home loan repayment ratio, ensure timely disbursement of loan and registration of property, and keep accurate records of loan repayment. By following these strategies, co-borrowers can maximize their tax benefits while repaying the home loan conveniently.