Split The Rent, Halve The Tax: How Married Couples Can Use Joint Rental Income To Lower Taxes?

Joint ownership of rental property by spouses in India offers a strategic avenue for tax optimization. By appropriately allocating rental income, couples can potentially reduce their overall tax liability.

According to Section 26 of the Income Tax Act, the rental income from a jointly held property should be divided among the joint owners in accordance with their respective ownership shares. By doing this, if a husband and wife are co-owners and co-borrowers of a property loan, they can both claim deductions under Section 24(b) for up to Rs 2,00,000 and 80C for up to Rs 1,50,000 for principal and interest repayments, respectively.

Legal Framework For Income Splitting

Under Section 26 of the Income Tax Act, when a property is co-owned, the rental income should be apportioned between the owners in proportion to their respective ownership shares. This holds true even if the rent is received by only one co-owner or if the rental agreement is in a single name. Each co-owner must declare their share of the income in their individual tax returns, and the recipient of the rent can attribute the appropriate portion to the co-owner.

Example

As per Shefali Mundra, Tax Expert at ClearTax, let's say the annual rental income from a jointly owned property is Rs 6,00,000. If the husband and wife own the property in a 50:50 ratio, each will report Rs 3,00,000 as rental income in their individual ITRs.

Each can then claim:

• Standard deduction of 30% on Rs 3,00,000 = Rs 90,000
• Resulting in taxable income from house property = Rs 2,10,000 per person.

Instead of one person paying tax on Rs 4,20,000 (after 30% deduction on Rs 6,00,000), the burden is halved, possibly keeping both in a lower tax slab, recommended Shefali Mundra.

Why Proper Paperwork Matters In Joint Ownership For Tax Benefits?

The Income Tax Act permits the income of house property to be split based on ownership share, meaning that if the property is owned jointly at 60:40 proportions, then the rental income and expenses (e.g. home loan interest) must be split in the same proportion, said Anurag Goel, Director, Goel Ganga Developments. If the spouse with the 40 per cent ownership, is in a lower tax bracket, this can produce a tax benefit by producing lower tax income on the total rental income generated.

However, simply putting a spouse as co-owner without formalities - i.e. not having a registered deed reflecting the ownership share—may raise questions from the tax authorities. Additionally, if the property is financed with a home loan, both parties should be co-borrowers in respect of the home loan to ensure the interest expense deducted is a proper reflection of ownership.

If you are confident that you can comply with the legislated formalities, including a letter outlining how the rental income will be divided and the legal formalities under which this is executed, the assets you create will help you minimize tax.

70:30 or 50:50? How Spouses Can Use Ownership Splits to Lower Tax Burden?

Through proper divisions of their ownership share - the two spouses can determine their rental income to the spouse with the lower tax slab (such as a 70-30 division or 50-50 division) - it addresses tax concerns.

As per Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Pvt Ltd, if one spouse has no other income in that tax year, they would claim the entire basic exemption limit. The most important aspects to get right are how the ownership ratio is reflected in legal documents, along with any home loan repayments, if there is one, made proportionately.

Tax Benefits of Joint Ownership

When both spouses are co-owners and co-borrowers of a property loan, they can individually claim deductions under Sections 24(b) (Upto Rs 2,00,000) and 80C (Upto Rs 1,50,000) for interest and principal repayments, respectively. Shefali Mundra said this can lead to significant tax savings, especially if one spouse falls into a lower tax bracket.

What To Avoid?

This strategy works only when both spouses are genuine co-owners. If the property is gifted to a spouse without monetary consideration, Section 64 kicks in - the rental income is still taxed in the hands of the giver, nullifying the benefit.

What To Keep In Mind?

Tax authorities take a close look at rental income reporting where the rental income split doesn't correspond to ownership. Make sure the tax returns and documentation are very clear on how the ownership and division of rental income were handled.

Couples need to consider the clubbing provision proposed by Section 64 of the Income Tax Act, particularly if the property has been gifted without adequate consideration. Therefore, it may be in their interest to speak with a tax professional to ensure any split is documented to justify their unique financial situation with respect to the tax legislation.

Splitting rental income between a husband and wife can be a legitimate income-splitting strategy in maximising tax benefits on rental income, as long as both are legal owners of the property. If you are confident that you can comply with the legislated formalities, including a letter outlining how the rental income will be divided and the legal formalities under which this is executed, the assets you create will help you save tax.

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