Co-ownership in a rented property

Many Indians purchase property under joint names. As mentioned in previous write-ups, if two or more people purchase property jointly, they can get tax benefits from sections 80c and 24 under the Income Tax Act.

Let’s now discuss another benefit to purchasing property in joint names. You can then take advantage of Section 26 of 1961’s Income Tax Act.

Taxation for Joint Ownership explained

Let’s take a look at Section 26 of the 1961 Income Tax Act. This section applies to joint property ownership by two or more than two persons having a rental income. Suppose a property that consists of buildings or lands and buildings is jointly owned by more than two persons, and their shares are definite or ascertainable.

In that case, the assessment of such property shall not be in accordance with an association of people. However, each person’s share in the income from the property, as calculated per sections 22-25, shall be included in his total income.

A family can save income tax on rental income by renting out residential, commercial, or industrial properties. You must mention in your sale deed the ownership percentage/share of each co-owner. Also, confirm that each purchaser has invested in the property equal in value to their share. Each co-owner must contribute their funds to purchase the property.

If the co-owners don’t have enough funds to purchase the property, they can apply for a joint loan from banks or NBFCs. They can also borrow money from friends, family, and bankers. Consider a reasonable interest rate if you borrow money from your spouse. This is often comparable to a bank home loan’s rate of interest.

Example sited 

Let’s take Mr and Mrs Parthasarathy, who plan to buy a house worth 50,00,000. They also decided to get a joint loan for 40,00,000. Each of them must contribute 5,00,000. (total share for the borrower is 10,00,000.) to their savings accounts so that the registry can mention their equal share. There are no restrictions on the number of co-owners.

When two or more people together own a house/flat/showroom/office space and let it out, the received rental income will not be assessed as an association of persons. It will come under separate assessment in the income tax return of different co-owners under their respective heads.

Income Tax liability reduced with co-ownership

Let’s say you buy a house and rent it out to your family. The rental income for the property would be 6,00,000 per annum. There is also income from a business or service. If your total income exceeds 20%, your income tax liability would be 30% after adding your rental income. If the same property is purchased jointly by you and your family members (spouse/father, mother, brother), their incomes from the house property would be 3,00,000.

You are now eligible for a lower income tax bracket, and each co-owner would have to pay less income taxes than in the previous situation. This will allow you to reduce the income tax rate on your house income.

Conclusion
To take advantage of section 26, income tax act 1961, you must ensure that the rental income is received in separate names for all co-owners of the property. Co-owners should not receive the full rental incomes independently in their individual names.  Income tax laws can help reduce your tax liability.