What is a Joint Home Loan?
Home loans are becoming more popular in India. India’s rising living standards is the main reason behind real estate development. With a home loan you can save a significant amount of income tax.
This loan is taken on a single property by more than one person. This type of home loan is usually for two or more people. Sometimes, the property has only one owner, so you can add a co-Applicant to increase the loan amount.
Who can co-borrow a home loan?
A spouse, unmarried daughter, father, mother, and son can co-borrow a loan.
If two brothers (siblings) buy a property, the bank may approve their joint home loan as both will be co-owners.
Sometimes, friends, sisters and unmarried couples can co-own a property. However, they are not considered co-borrowers. Banks and housing finance companies may consider these types of cases on a case-by-case basis.
Banks will not lend loans to more than two of their friends (cousins, etc.) because there is a chance that they might have future disagreements or disputes which could lead to court cases, etc
Is it compulsory to be a co-owner of a property for a joint home loan?
It is not mandatory. There is no difference between co-applicants and co-owners. The former has a share of the property, while the co-applicant is responsible for repayments if the primary applicant cannot.
Co-ownership in relationships such as son-father, husband-wife and son-mother is not required. It is, however, mandatory in some cases.
If a father and his daughter, who is not married, purchase a property and need a loan to pay it off, they should be co-owners. If two or more of your relatives, friends, or brothers apply for a home loan, they must co-own the property. In general, most banks and finance companies allow six co-applicants. Banks will not allow more than six co-applicants. The maximum repayment period is 70 years.
The oldest co-applicant determines the repayment period. If the age of the father is 55 and his son is 30, the bank will approve a loan for 15 years.
Are all co-borrowers eligible for the income tax exclusion
Yes
Co-borrowers can all benefit from income tax exemption. However, it is mandatory that co-borrowers be co-owners and that each borrower repay the loan.
All co-borrowers who are co-owners of the property will receive section 80C/24 income tax. This will determine their loan repayment amounts.
What are the advantages of a joint home loan?
1. If the property is not self-occupied, all co-borrowers can receive a maximum 80C (Repayments of principal up to 1,50,000/per). Section 24 Interest repayment up to 2,00,000. per co-borrower for a property that is not self-occupied.
2. It is a good idea to have a co-applicant if you need a larger loan amount. This will allow the bank to increase your loan amount.
Case Study
Officer in the Rajasthan Government, Mr Dilbar Singh. He purchased a plot of Jaipur Development Authority land in Mrs Roopa’s honour a few years ago. Mrs Roopa earns a living from counselling and private teaching. They built a two-storey house on the plot.
They approached a nationalized bank to get a home loan. Both want a home loan up to 20 lakh, but Mrs Roopas monthly income was not enough to get the loan amount she desires. A bank officer suggested that they combine their incomes with being eligible for the loan amount they desire. The approval of the loan was in joint names. Their dream home was available for possession in less than one year.
But, Mr Dilbar Singh made a mistake when he purchased the plot.
What was the error?
The purchase of the property was in the name of his wife. This is a common error that millions upon millions of Indians make.
Why?
1. Many people are unfamiliar with income tax laws.
2. A lot of states have lower stamp duties for women who purchase the property. To avoid paying a higher stamp tax, the purchase of property is in the name of the woman who is a common housewife in Indian families.
3. Many businessmen and employees don’t want their property disclosed because they might have used black money to purchase it.
Let’s now return to our case study.
Both Mr Singh and Ms Roopa were repaying the loan out of their joint accounts. Mr Singh, as co-applicant to the house, wanted to deduct the interest payments from his income tax returns. He obtained an interest certificate from the bank for this purpose. While the bank can issue an interest certificate to both applicants, it may not consider their ownership. However, it might mention some income tax laws. You may also notice that the Income-tax Act 1961 allows any person who takes out a loan to purchase residential property within the period of 1 April 1999 to be entitled to deduct interest for the self-occupied property up to a maximum of 2,00,000. Both borrowers were well aware of this provision. They decided to take the interest deduction and the tax deduction to repay the principal amount under Section 80C Income-Tax Act 1961.
This is very common for many young, earning couples. They get a joint loan and pay the principal and interest together. In addition, they also receive tax deductions.
Mr Singh, a co-borrower, was not able to receive any tax benefits
Why?
The answer is very simple. Ms Roopa was the single owner of the plot and the house. Since Mr Singh was not the plot owner, he did not have a legal right to the immovable property he had taken loan. In the absence of a legal title, the benefit in respect of interest deduction as well as by way of tax rebate on repayment of housing loan could not be extended to Mr Singh. The matter did not end here. Ms Roopa, in any case, could also not enjoy full tax deduction in respect of interest on loan paid by her husband. She could only enjoy half of the interest which she had paid. The benefit also depends on the share of repayment in the loan. From the case history of Mr Singh and Ms Roopa, we can conclude that it is never a good idea to make another family member a co-applicant or borrower in the loan when the land/building belongs to only one person.
How to rectify the mistake
Coming back to Mr Singh’s problem, the only way to rectify the mistake was to purchase half of the building portion belonging to Ms Roopa. Now it is clear that Mr Singh has to execute a sale deed buying out half portion of the house belonging to Dipali. This allows him to become the legal co-owner of the house, which will allow him to enjoy tax benefits on the interest payment and principal payment made by him as a co-borrower. However, the disadvantage here is that Mr Singh has to pay the stamp duty as per the state stamp act. Moreover, when the property is under mortgage with the bank, he cannot sell the property.
It is a good idea to learn from other people’s mistakes so that you don’t commit the same mistake. Therefore it is advisable to purchase property jointly rather than singly. Purchase a property along with your other family members. All the co-owners can take a home loan and take other income tax benefits individually of joint property ownership
Should You Take A Home Loan Jointly With Your Spouse?
Have you and your spouse desired to buy a house with the help of a joint home loan? As the expectation of purchasing a house seems EXCITING to a married couple, they need to contemplate both the ups and downs of taking a joint loan.
Benefits
Bigger loan: You will be eligible for a higher loan as a couple than an individual loan limit. So if your eligibility for a loan may be ’30 lakh, combined with the spouse’s limit of, say, ’20 lakh, your combined loan limit could go up to ’50 lakh and may entitle you to buy a larger house.
Concessions: as there is a benefit of banks charging a lower interest for women applicants With several banks offering lower interest rates to, it could help to have the wife as a primary applicant for the home loan. Similarly, the stamp duty fee for the house registration is lower for women and couples, varying marginally in different states.
Tax benefit: We have already discussed it in previous blogs.
Drawbacks
Divorce or death: Loan repayment can become a sore point in case of differences or a split between the spouses. If the husband stops paying the EMI and the wife is only a co-applicant the burden of repayment of the entire loan will be the wife’s responsibility without the benefit of ownership. Even in case of demise, the surviving spouse will have to shoulder the repayment. The lender has the authority to take away the assets of a co-applicant in case of non-repayment.
Limited share: The wife who is the co-applicant will only get one-third of the share of the property if the husband dies without a will., as legal heir. . Parents, wife and children of the deceased will divide the assets among themselves.
Eligibility & credit score: , the credit score of both partners will be affected equally in case one of the spouses refuses to pay the EMI Similarly, any case of default will impacts their eligibility for a loan in the future.
Security
Insurance: To ensure that the home loan burden does not fall on one partner in case of death or divorce, it is good for the primary applicant to buy a term insurance plan and include the home loan liability in the cover.
Agreement: it is advisable in anticipation of differences in the future, the spouses should have an agreement documented specifying the share of loan liability of each partner in case of a dispute and have it notarized.
Real estate investment is a long term investment. Hence be careful and always seek guidance from tax advocates, financial planners, bankers or your friends and relatives who have sound knowledge of tax planning in real estate investment.
