Everything You Need to Know About a Co-Applicant in a Home Loan and Tax Benefits

Planning to apply for a Home Loan? Adding a financial co-applicant can increase your loan eligibility and help you secure a higher loan amount. Moreover, a financial co-applicant can also enjoy tax benefits on the Home Loan if certain conditions are met.

In this article, we explore who a financial co-applicant is, the benefits of having one, how tax benefits can be availed by both applicants, and the steps involved in removing a co-applicant from a Home Loan.

Who is a Financial Co-Applicant in a Home Loan?

A financial co-applicant in a Home Loan is an individual who applies for a loan jointly with the primary applicant. The co-applicant shares the responsibility of loan repayment but may not necessarily co-own the property. This collaborative application approach can be beneficial in situations where the primary applicant’s income alone does not meet the lender’s eligibility criteria.

Lenders prefer a co-applicant with a stable income and a satisfactory credit history. It is important to note that being a co-applicant is not the same as being a co-borrower. A co-borrower is jointly responsible for the loan, while a co-applicant’s role may vary depending on the agreement and lender’s policy.

Eligible Co-Applicants

In India, the following individuals are typically considered eligible to be co-applicants in a Home Loan:

• Spouse: The most common co-applicant choice, combining incomes to increase eligibility.
• Parents: Either or both parents can join as co-applicants to help children get higher loan amounts.
• Children: Working sons or daughters can be co-applicants when parents are primary borrowers.
• Siblings: Brothers or sisters can join in cases where they are co-owners of the property.

Ineligible Co-Applicants

While family members are usually eligible, some relations do not qualify:

• Friends: Lenders typically do not accept friends as co-applicants
• Distant Relatives: Only immediate family members are generally accepted
• Minors: A person below 18 years of age cannot be a co-applicant

Benefits of Having a Financial Co-Applicant in a Home Loan

Adding a financial co-applicant to your Home Loan application can offer several advantages. Let us examine the key benefits:

1. Increased Loan Eligibility

The combined income of both applicants boosts your eligibility, allowing you to apply for a higher loan amount. For instance, if your salary alone does not meet the lender’s requirement, adding your spouse’s income may increase your eligibility.

2. Shared Financial Responsibility

The repayment obligation is shared between both applicants. In the event the primary borrower faces financial difficulties, the co-applicant can take over EMI payments. This ensures that the applicants pay the EMIs on time without incurring late payment charges. It also helps maintain a good credit score for both parties.

3. Tax Benefit

When both applicants are also co-owners of the property, they can claim tax deductions individually. This effectively doubles the tax benefits under Sections 80C and 24(b) of the Income Tax Act, 1961. This can significantly reduce the overall tax liability when both parties contribute to loan repayment.

Can a Co-Applicant Claim Tax Benefits on a Home Loan?

Yes, a co-applicant can claim tax benefits on a Home Loan, provided they meet certain criteria. To avail tax benefits, it is essential that the co-applicant is also a co-owner of the property and actively contributes to loan repayment.

1. Principal Repayment (Section 80C)

A co-applicant can claim a deduction of up to Rs.1.5 Lakh annually on the principal repayment of a Home Loan. This benefit is available individually, allowing both co-applicants to maximise deductions if they jointly own the property and contribute to EMI payments.

2. Interest Payment (Section 24(b))

Under Section 24(b), each co-applicant can claim a deduction of up to Rs.2 Lakh annually on the interest paid for a self-occupied property. In the case of a rented property, there is no upper limit on the interest deduction. This dual benefit significantly reduces the taxable income for both parties.

3. Conditions for Availing Tax Benefits

To claim the tax benefits:

• Both applicants must be co-owners of the property
• Both must contribute to loan repayment
• Deductions must be claimed proportionately to the share of ownership

If the above conditions are met, both applicants can enjoy substantial tax relief.

When you apply for a Home Loan with a co-applicant, there are some key responsibilities to consider:

1. Joint Liability for Repayments

As both applicants are equally liable, it is important to have clear communication about repayment responsibilities. In case the primary borrower is unable to pay the EMIs, the co-applicant must step in to avoid loan default and a decrease in the credit score.

2. Shared Ownership

If the co-applicant is also a co-owner, they have legal rights over the property. This means that any decisions regarding property sale, rental, or renovation will require joint consent.

3. Impact on Credit Score

The credit scores of both applicants are impacted by their repayment behaviour. Timely EMI payments can improve scores, while defaults negatively affect both. Therefore, both applicants should ensure consistent payment to maintain their creditworthiness.