Property purchase transactions

In cases of joint property ownership and home loans, tax treatment is primarily determined by actual ownership and actual contribution toward loan repayments.

1. Ownership and Repayment Ratio

• The "50:50" vs. "Actual" Debate: Tax authorities look at who actually paid for the property and the loan. While you may register a property in a 50:50 ratio, if the husband pays the entire EMI and the wife has no independent source of income, the tax department may deem the husband the "beneficial owner" of the entire property under the concept of deemed ownership.

• Recommendation: To claim tax benefits, both spouses should ideally be:

  1. Co-owners of the property.

  2. Co-borrowers on the loan.

  3. Contributing to the EMI from their own respective bank accounts in proportion to their claimed share.

2. Tax Benefits (Old Tax Regime)

If both are co-owners and co-borrowers contributing to the EMI, they can claim deductions in their individual tax returns based on their contribution:

• Interest Deduction (Section 24(b)): Each co-owner can claim up to ₹2,00,000 per year for a self-occupied property.

• Principal Repayment (Section 80C): Each co-owner can claim up to ₹1,50,000 per year (within the overall ₹1.5 lakh limit).

3. Accounting Entries

For accurate tax filings and to avoid scrutiny:

• Documentation: Maintain a clear paper trail showing that repayments are made according to the agreed-upon ratio. If the wife is a co-borrower, it is highly advisable for her to contribute to the EMIs from her own bank account to substantiate her claim for tax benefits.

• Records: Keep copies of the home loan sanction letter (showing both names), property deed, and bank statements clearly highlighting EMI payments made by each individual.

Summary

To avoid tax complications, the "correct method" is for both spouses to be co-borrowers and co-owners who contribute to EMIs from their respective accounts. If only one person funds the property, claiming a 50:50 split purely for tax benefits can be challenged by the Income Tax Department as "deemed ownership," potentially resulting in the entire income or tax benefit being attributed to the actual payer.

Summary: For tax purposes, benefits like interest and principal deductions are linked to actual ownership and contribution. To split benefits, both spouses must be co-owners, co-borrowers, and contribute to EMIs from their individual bank accounts. Merely registering the property in both names without actual contribution may not hold up if questioned by tax authorities.