Many homebuyers believe that registering a property jointly with their spouse automatically helps save tax. Is that always true? Under what conditions can a husband and wife actually split rental income, capital gains, and home loan tax benefits?
Merely adding a spouse’s name to a property’s title does not, by itself, create a tax saving.
A tax benefit is generally available only where the spouse has a definite and ascertainable ownership share, and, where a home loan deduction is claimed, is also a co-borrower who actually bears the relevant repayment obligation.
If a husband and wife own a house together, then income is taxed separately, and each spouse is taxed only on their respective ownership share. Where the ownership ratio is not mentioned in the sale deed, tax authorities generally treat the ownership as 50:50.
Both must pay for the joint property from their own income and make bank-traceable payments in order to prevent income from being entirely taxable in their hands; in this situation, a tax liability can be lowered to 50%.
This allows each spouse to report their share of income and claim eligible tax benefits separately.
If husband and wife are both co-owners as well as co-borrowers of the property in that case, each individual can claim deduction up to Rs 2 lakh interest under Section 24(b), Section 80C deductions of up to Rs 1.5 lakh and also if they are first-time buyers each person can enjoy benefits under Section 80EE/EEA of up to Rs 50,000 and Rs 1,50,000 respectively but not at the same time.
The additional deduction under Section 80EE of up to Rs 50,000 per financial year is available only if the home loan was sanctioned between April 1, 2016, and March 31, 2017, for a residential property valued at up to Rs 50 lakh, with a loan amount not exceeding Rs 35 lakh.
On the other hand, an additional deduction of up to Rs 1.5 lakh under Section 80EEA can be claimed only if the loan was sanctioned between April 1, 2019, and March 31, 2022, the property’s stamp duty value does not exceed Rs 45 lakh, and the taxpayer did not own any other residential house property on the date the loan was sanctioned.
The rental income can be divided in accordance with the ownership ratio if the jointly held property is rented out. The 30% standard deduction, interest deduction on each spouse’s share, and tax, if paid exclusively on the individual portion, can all be claimed individually.
Each co-owner is responsible for paying tax on their portion of the capital gains if you sell a jointly held property. The co-owners’ income tax slab and the duration of time they have owned the property will determine how much tax is payable. Each spouse may claim exemptions under Sections 54, 54EC, and 54F in the case of joint property.
“Joint ownership can produce a legitimate tax advantage where both spouses have independent sources of income; each spouse obtains a real, recorded and beneficial ownership share and each spouse contributes their own funds, or incurs genuine borrowing liability, for that share. Where any share of property is acquired without any corresponding contribution, the Indian tax law provides for clubbing provisions as per which the income from such property share can be clubbed in the hands of the spouse who is the contributory for the property,” said Shabnam Shaikh, Partner at Khaitan & Co.
Accordingly, a careful cost-benefit analysis and documentation on a case-to-case basis should be undertaken to ascertain if there is any potential scope for legitimate tax planning.
What happens if one spouse pays the entire purchase price or home loan EMI?
Suppose a property is jointly registered in the names of husband and wife, but the entire purchase price or home loan EMI is paid by only one spouse. Can both still claim tax deductions and split the rental income or capital gains? How do the clubbing provisions apply in such cases?
If one spouse alone funds the purchase price or entire EMI, joint registration does not automatically permit both spouses to claim deductions or split income.
The tax deduction (if any) can be claimed only by the person who incurs corresponding liability for interest/principal repayment.
Similarly for income sources (such as rental/capital gains), the Indian tax law includes clubbing provisions which are aimed at preventing tax avoidance and clubbing income in the hands of the concerned spouse who has contributed to such property in substance and not merely by its legal form.
Thus, mere legal ownership of property cannot result in tax savings, and one needs to see through the ownership if the facts require so.
What documents should couples maintain to avoid tax disputes?
Apart from the usual documents recording legal ownership such as purchase agreement, allotment letter, possession certificate, the owners should also maintain adequate documentation for the source of funds used for property acquisition such as:
(i) bank statements;
(ii) loan documents (in case of leveraged acquisitions);
(iii) tax returns and books of accounts for past years;
(iv) any other documents relating to source of income, in cases where the acquisition is funded through gifts/loans from parents or siblings.
Common mistakes that invite scrutiny
According to Shaikh, taxpayers should avoid the following common mistakes to mitigate the risk of receiving an income tax notice.
Nominal joint ownership: Adding a spouse’s name to the sale deed while one spouse funds the entire acquisition and the other has no independent source, repayment obligation or beneficial interest.
No payment trail: Cash payments, transfers through unrecorded accounts or undocumented reimbursement arrangements.
Double claiming: Both spouses claiming the entire interest or principal repayment, rather than only their respective eligible portions.
Co-owner but not co-borrower: A spouse claiming housing-loan interest without being liable under the loan documentation.
Ignoring clubbing: Treating a gifted cash contribution or gratuitously transferred property share as independently owned by the recipient spouse without considering clubbing provisions – one should therefore take appropriate legal advice.
Documentation: One should maintain all supporting documentation relating to property to avoid any issues in case of scrutiny by tax authorities, as often adverse findings are a consequence of insufficient documentation by individuals.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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