Income tax for dummies: Married couple with a joint home loan
So you have already made the two biggest investments of your life. First, your marriage and second is buying a property. Though I would stay clear of saying anything about the former, I can vouch for one thing that a house is the most expensive purchase that most couples make in their lives. And with sky-high prices, most such purchases are funded by home loans.
Let’s answer some frequently asked questions (FAQs) that will help you as a couple get smarter about tax saving.
Question: Can both husband and wife claim tax benefits on interest and principal of the home loan?
Answer: Yes. But only if both of you are co-owners of the property, in addition to being co-applicants of the loan. A co-borrower, who is not a co-owner, is not entitled to tax benefits.
Taking a joint loan enhances the eligibility of your home loan application. A single applicant’s income might not be sufficient for servicing a high loan amount.
The tax benefit is available for both principal and interest components of the loan. Under Section 80C, the limit for deduction of principal is ₹1.5 lakh. For interest, the Section 24 allows deduction of up to ₹2 lakh for self-occupied property.
Now in case of joint loan (50:50), both husband and wife can claim these benefits separately. Hence, the combined limit turns out to be ₹3 lakh under Section 80C and ₹4 lakh under Section 24. The tax benefit is shared in proportion to the share in loan.
Question: Is a loan on under-construction property also eligible for tax benefits?
Answer: Generally, prices of under construction properties are lower than those of existing ones. Hence many buyers prefer buying such properties. But tax treatment of loan taken for under-construction property is not the same as for one taken for ready-to-move properties.
So if you are already paying regular EMIs for an under-construction property, you cannot claim any deduction for principal repayment till construction is over.
Luckily, the benefit of deduction is available for interest component, but that too only from the year in which construction gets over. But even then, you still get to claim for all the interest paid during construction years.
This can be done by claiming the accumulated interest paid up to the year before completion, in 5 equal instatements along with regular interest for the year.
Question: Can both husband and wife claim HRA if living on rent together?
Answer: If both are earning and stay together, then both can claim exemption up to the share of rent actually paid by them. For this, it’s best that the landlord issues either two separate rent receipts or one receipt specifying the amount paid by each. In this way, there will be proper documentary evidence to support entitlement for HRA exemption.
Question: What type of insurance policies should be purchased by a married couple and what are the tax benefits?
Answer: I am a firm believer of keeping insurance and investments separate. Hence when it comes to insurance, it’s best to stick with plain term insurance, which provide maximum coverage at very low costs.
Many people feel that money spent on term plan goes waste as you don’t get anything on maturity (survival). But it can be proven mathematically that out of the following 2 options having same annual premium payments / investments:
- Buying one insurance-cum-investment product (endowment, money-back, etc.)
- Buying a plain term insurance + invest in equity MF
The second option: Buy a term insurance and invest remaining amount in MFs, which gives higher returns and higher insurance coverage.
Question: Which is better for tax-saving and investing – Long-term FD or ELSS?
Answer: On the face of it, a long-term FD looks like a safe option to save tax as well as earn some decent interest income. But historically, ELSS have given better average returns than tax-saving FDs. In fact, some good ELSS schemes have given average post-tax returns above 14% for many years.
The interest income on tax saving FDs is also taxable at time of redemption and after 5-year lock-in. In contrast, an ELSS has a lock-in of only 3 years and there is no capital gains tax if held for more than 12 months. This makes ELSS a much better option than FDs, if one is of course ready to accept the short-term volatility associated with investing in equities.
Question: Can we claim tax benefits on premiums paid for health insurance of our parents?
Answer: Yes. Premium paid towards health insurance of your parents is eligible for deduction up to Rs 25,000 every financial year. This amount increases to ₹30,000 in case of either parents being a senior citizen.
Question: We have a daughter. Is it worth investing in Sukanya Samriddhi Account (SSA) for her future?
Answer: SSA has been launched with an intent to help parents fund girl child’s education and marriage. Though scheme’s duration is 21 years, you are only required to make contributions for first 14 years. The amount deposited towards SSA is deductible under section 80C and is counted in the overall limit of ₹1.5 lakh of the section.
SSA earns 9.2% fixed return every year. In comparison, equity MFs give better average return over similar periods (14 / 21 years). But if someone has a low risk appetite and wants to save with a specific target of girl’s education and marriage in mind, then SSA can be an option worth considering.