A top-up home loan is an intelligent move to receive the advantage of low-interest money, but what if you end up lending the money to your homemaking wife? From the tax point of view, the effect largely depends on what you use the loaned money for. Although the transaction itself is quite straightforward, it can influence your tax deductibility and how the money earned from the funds is taxed under Indian tax legislation.
Tax benefit depends on end-use of the loan
If the money borrowed through the top-up home loan is used for house-related expenses—such as construction, repair, or renovation of a residential property—you may be eligible to claim a tax deduction on the interest paid. Under Section 24(b) of the Income Tax Act, interest on home loans qualifies for deduction up to ₹2 lakh per annum if the house is self-occupied. If the house property is let out, no limit exists on the deduction of interest, although set-off provisions exist for losses from house property.
In such a situation, the channel in which money is spent—directly by you or indirectly through your wife—is not a consideration for deduction. What is important is that you, being the borrower, are servicing the EMI and that the money is for a housing purpose. You need to keep documentary evidence to demonstrate how the money was spent, in case of a claim made during a tax audit.
No tax deduction in case the loan is applied for personal or investment purposes
But in case your wife spends the money on non-property expenses, for example, investing in fixed deposits, mutual funds, or business, you won't be allowed to claim the interest paid on the top-up loan as a tax deduction. The Income Tax Act doesn't provide for deducting interest on loans taken for personal expenses or general financial support that is not related to a home.
In addition, there's also a tax implication if your wife uses the borrowed money to invest and earn income. Since she lacks a source of income of her own and the capital came from you, the income that accrues on that money will be aggregated with your income under the provisions of clubbing of Income Tax Act. For example, if your wife makes interest or capital gains on investments using the borrowed money, the income will be taxed in your hands.
Loan documents and utilization proofs are important
In order to escape any confusion at tax audit, it's essential to keep adequate documentation. There is no prohibition on borrowing money from a spouse but the source of funds—being a top-up home loan—needs consideration. It is better to have written evidence of the transaction of the loan, usage of the money, and supporting bills or receipts if you plan to claim deductions.
Borrowing from your homemaker wife using a top-up home loan is legally acceptable, but the tax treatment wholly depends on the utilization of funds. Provided that the proceeds of the loan are used for the building or enhancement of a housing property, you can continue to claim a tax deduction on the interest. However, if the money is put to personal or investment use, not only do you forfeit the tax advantage, but even the income that your wife earns from that money will be taxed in your name. Careful planning and documentation are essential to controlling both the tax burden and compliance necessities.
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