For buying a house, one has two options – either to take a loan or use your own funds. The sky-high property prices mean that most of us are unable to afford an outright purchase without availing of any loan whatsoever. However, even those fortunate few who have the deep pockets to buy a house off the shelf should avail themselves of a loan.
For starters, interest outgo on a loan up to Rs 1.5 lakh is tax deductible. Moreover, the capital repayments are eligible for a Sec. 80C deduction up to Rs 1 lakh. This is for a single property. In the case of more than one property, on one hand, it is taxed on a notional rent basis (even if not rented out), on the other, the entire interest paid is tax-deductible. In other words, the limit of Rs 1.5 lakh is applicable only to the first property. From the second property onwards, the entire interest amount is deductible. Now, if one were to use one’s own funds, these benefits are foregone. There are absolutely no tax benefits available for someone who wants to buy a property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Property can be co-owned and each co-owner is eligible for the tax benefits. However, there are certain points that should be kept in mind to extract the maximum tax benefit. All co-owners should be joint applicants for the loan. This is extremely important from the point of view of the tax benefits.
Take the case of a husband and wife. While buying the property, both should have a specified share. Also, the loan should also be taken in the same proportion and the interest and principal payments for the same should be made separately by each.
If this strategy is followed, each is individually entitled to an interest deduction of up to Rs 1.50 lakh under Sec. 24 and a principal deduction of up to Rs 1 lakh under Sec. 80C. So totally between the two, up to Rs 5 lakh of income will escape tax!
Putting it differently, for availing of the tax breaks, the asset has to belong to the person and the loan as well. Often, taxpayers possibly being unaware of this principle make their property purchases in anomalous ways. The house may be purchased in the wife’s name but, it is being financed by a joint loan with EMIs being paid by both the husband and wife. This can be possible as the purchase agreement with the builder is distinct from the agreement with the housing finance company. If the housing finance company feels that the wife’s income alone is not enough to service the loan, it may insist on the husband being a co-applicant. However, realize that the husband is paying for something that does not belong to him. Conversely, the same principle is applicable where the house is purchased in joint names but the entire EMI comes from the husband. In this case too, the husband pays for 50% of an asset that does not belong to him.
Take care to avoid one additional trap. A co-applicant on a loan is not the person responsible for paying the EMI installments. He is there only in case of default by the main borrower. Also, the co-applicant has no right to continue to stay in the property if the finance company decides to take over the property.
Therefore, it is best to co-own the house in specified shares and take a joint loan.
Salary TDS and second house property
While on the subject, the following is a brief discussion on the TDS treatment from salary in the case of an employee who has purchased a second property. Readers would be knowing that an interest up to Rs 1.50 lakh payable on one house and so also the 80C deduction of principal repayment up to Rs 1 lakh is taken into consideration for the purposes of determining the amount of TDS on the employee’s salary and, the same appears in the Form 16 provided by the employer. The question is; what should be the treatment where the employee has purchased a second house on mortgage and is paying the EMIs thereon? Since the entire interest payable for the second house is tax deductible, shouldn’t it also be considered for purposes of TDS calculation by the employer?
Regrettably, the answer is not very clear. Central Board of Direct Taxes (CBDT) circulars dealing with deduction of tax at source from salaries, while clearly indicating that interest deduction on housing loans in respect of a self-occupied residential house will be considered in arriving at the TDS on salary, is silent on the issue of the treatment where there is a second property (or the first property itself is rented out), thereby making the entire interest deductible without any limit.
This silence on the part of the circular has resulted in some employers allowing the benefit of the additional interest while others expressly disallowing the same i.e. limiting the adjustment (for TDS on salary purposes) to only the interest in respect of a self-occupied residential house. However, note that this is only for arriving at the amount of salary TDS. The tax deduction, per se, is available as explained in the earlier part of the article and the assessee employee should claim the same through filing his or her tax return.