Owning property jointly with others is common, whether among family members, business partners, or investors. However, the taxation of such co-owned property is subject to specific rules under the Income Tax Act. This blog explains the tax implications of co-owned property and how income from such property is assessed under the law.
Understanding Co-Ownership of Property
When a property consisting of buildings or buildings with land appurtenant thereto is owned by two or more persons, the tax treatment depends on whether their shares are definite and ascertainable.
If the shares of co-owners are clearly defined, the property is not assessed as an Association of Persons (AOP). Instead, the share of each co-owner in the income from the property is computed separately and included in their total income as per Sections 22 to 25 of the Income Tax Act.
Taxation Rules for Co-Owners
1. Assessment of Co-Owners Individually
When co-owners have definite and ascertainable shares, the following tax rules apply:
Each co-owner is taxed only on their share of the income from the property.
The property is not treated as an AOP for taxation purposes.
Deductions and exemptions available under Sections 22 to 25 are applied individually to each co-owner.
2. Determining Share of Income
The share of each co-owner in the income from the property is determined as per their ownership agreement or as per the property title deed.
For instance, if two individuals own a property with equal shares, each will be taxed on 50% of the rental income or deemed income from the property.
3. Application of Section 23(2)
As per the Explanation to Section 26, while computing each co-owner’s share, the provisions of Section 23(2) apply individually. This means:
If the property is self-occupied, each co-owner can claim the self-occupation benefit on their share.
If the property is let out, the rental income is divided among the co-owners based on their ownership ratio.
4. Deductions Under Section 24
Each co-owner can claim deductions proportionately under Section 24, such as:
Standard Deduction (30%) on rental income.
Interest on Home Loan Deduction up to ₹2,00,000 (for self-occupied property) or the actual interest paid (for let-out property).
Tax Benefits for Co-Owners
Owning property jointly can offer tax benefits, such as:
Separate Home Loan Interest Deduction: Each co-owner with a separate loan can claim interest deduction under Section 24(b).
Principal Repayment Benefit: Each co-owner can claim principal repayment deductions under Section 80C, up to ₹1,50,000.
When Co-Owners are Treated as AOP
If the shares of co-owners are not definite and ascertainable, the income from the property is assessed in the hands of an Association of Persons (AOP) and taxed accordingly. This can lead to a higher tax liability.
Conclusion
For tax efficiency, it is crucial to ensure that the ownership shares of a property are clearly defined in legal documents. Co-owners can benefit from individual taxation, self-occupation deductions, and separate home loan interest claims, helping to optimize tax liability effectively.
If you are a property co-owner, consult a tax expert to structure your ownership in the most tax-efficient manner and maximize deductions.
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