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Journalism of Courage
MR & Ms Shah,both salaried individuals,reside in a house funded by a housing loan. In view of the enormous capital appreciation in property prices in recent years,the they want to invest in another house. However,before doing so,the couple wants to understand the related tax implications.
There is zero tax for a self-occupied house. However,a maximum of Rs 1,50,000 per year for interest on loan taken for funding a self-occupied house is deductible from income (no limit where the house is rented or deemed to be let out). Deduction under Section 80C of IT-Act is available up to Rs 1,00,000 for repayment of principal portion of the loan. Only one house can be treated as self-occupied and the second house (as per the individuals choice,which typically would be the house with the lower rental value) is deemed to be let out and taxed based on a notional rental value. A second house qualifies as wealth on which wealth tax at 1% of value is leviable if net wealth exceeds Rs 15 lakh.
Joint vs single ownership
Decision on ownership of house no 2 should be based on factors like who will be funding the EMIs,is there any rental income,and quantum of loan and interest. Where Ms Shah is earning income to fund the EMIs,it would normally be preferable to have the second house in Ms Shahs name since there will benefit of Rs 1,50,000 interest deduction,Section 80C benefit and wealth tax exemption could be individually claimed by the couple for respective houses. This preference can vary where interest expenditure is far in excess of Rs 1,50,000 annually,as house no 2 in Mr Shahs name will be eligible for full interest deduction,whether rented or deemed to be rented. Preference for ownership in Ms Shahs hands could be driven by wealth tax and Section 80C considerations.
Where the funding is by both,the house could be jointly owned with differing tax implications for respective shares. For Ms Shah,the house will be treated as self-occupied with interest deduction up to Rs 1,50,000 and for Mr Shah,it will be deemed let out with unlimited interest deduction.
Where the funding is entirely by Mr Shah,then registering the house in Ms Shahs name will not give the double tax benefit since there are clubbing provisions,which deem the income arising in Ms Shahs hands to be Mr Shahs income and even the housing finance company would insist on the earning member being at least a co-owner. There are loaning funds to a spouse for their share of a jointly owned property,which overcome some of the clubbing provisions but where the house itself is funded by a loan,this may be possible only for the self-funded share. Finally,there are legal aspects to be kept in mind.
* The writer is director,(tax & regulatory services),Ernst & Young
