There was a compelling reason for Vivek Priyadarshi, 36, and his wife Sushma, 35, both government employees in New Delhi, to take a joint loan of Rs15.5 lakh in 2003 for their house in Dwarka. Neither would have been able to service the 15-year loan in their individual capacity, says Vivek, given that the EMI at the time was Rs16,000 a month, or Rs1,92 lakh a year. Both had a cost-to-company of not more than Rs3 lakh, which meant the annual outgo worked out to a substantial chunk of either’s individual take-home pay.
Going joint was the obvious way out. It not only gave them the loan amount they were looking for, but also gave them another benefit most couples look for when buying property on mortgage—tax savings.
Under section 80C of the Income-Tax Act, the principal amount repaid each year is deductible from your taxable income, subject to a ceiling of Rs1 lakh. This ceiling applies collectively to principal repayment, contributions to provident fund, premium payable on a life insurance policy and other investments/contributions. So, if you’ve contributed Rs70,000 to your PPF, for instance, the deduction available with respect to principal repayment on your home loan is reduced to Rs30,000. Under section 24, the interest paid each year is allowed as deduction to the extent of Rs1.5 lakh on a self-occupied house. If the house is let out, the entire amount of interest paid is allowable.
If it is a joint loan, and both parties are taxpayers, each can claim the above benefits. To understand how it works, let’s take the case of a hypothetical couple, both in the highest tax bracket, equally servicing a 20-year, Rs30 lakh loan at 11% rate of interest. It is their first house and they are going to be staying in it. Their EMI works out to Rs30,965.65, of which Rs27,500 goes towards interest in the first month and Rs3,465.65 towards principal repayment.
The table below compares: a) The amount of deduction both of them would be entitled to on the joint loan at the end of the first, fifth, 10th, 15th and 20th years of the loan, with b) The amount either of them would have got as deduction if the loan was not a joint loan.
Assuming the tax rate at the highest bracket remains constant at 30% throughout the loan tenure, the couple would have saved Rs1,03,125 in taxes in the first year and as much as Rs20,76,764 over the 20-year period. If it was not a joint loan, they would save only Rs58,125 in the first year and Rs13,24,052 over 20 years.
(Figures in red indicate tax deduction available in case of an individual loan taken on identical terms. Figures are indicative)
Taking a loan
The loan agreement must specify the share of each partner in the house and the EMI. Says Rattan Chugh, chief executive, Cornerstone Wealth Management: “Most banks insist on a joint account from which the loan can be serviced through automatic debits. The couple could also have separate accounts in the financing bank from which the EMIs could be debited in the ratio specified in the agreement. The bank would also issue separate certificates at the end of the financial year, specifying the amount of principal repaid and interest.”