Property Owned by Co-owners [Section 26]

Section 26 of the Income Tax Act governs the taxation of income from properties jointly owned by two or more individuals. It ensures that co-owners are individually assessed on their respective shares of rental income or losses, rather than being taxed as an Association of Persons (AOP).

Key Provisions of Section 26

1. Individual Taxation of Co-owners

• If a property is co-owned with definite and ascertainable shares, each owner is taxed separately on their portion of income.
• Example:If A (50%), B (30%), and C (20%) jointly own a property generating ₹1,00,000 annual rent:
  • A’s taxable income = ₹50,000
  • B’s taxable income = ₹30,000
  • C’s taxable income = ₹20,000

2. No Assessment as AOP

• Even if co-owners file a joint return as an AOP, income mustbe split and taxed individually.
• Exception:If shares are not definite, the property income may be assessed as AOP.

3. Deductions & Losses

• Each co-owner can claim:
  • Standard deduction (30% of NAV)on their share.
  • Interest on home loan(up to ₹2 lakh for self-occupied property; no limit for let-out).
• Losses can be set off against other income (max ₹2 lakh/year) or carried forward for 8 years.

4. Self-Occupied vs. Let-Out Property

• Self-occupied:Annual value = Nil for each co-owner’s share.
• Let-out:Income is computed as if owned by one person, then divided proportionally.

5. Documentation & Compliance

• Co-owners must maintain:
  • Ownership agreementsspecifying shares.
  • Rental income records(if let out).
  • Loan interest certificatesfor deductions.

Practical Example

Scenario:

• Property owned by X (60%) and Y (40%).
• Annual Rent:₹1,20,000
• Municipal Taxes:₹10,000
• Interest on Loan:₹1,50,000

Calculation:

• X’s Share (60%)= ₹(43,800)
• Y’s Share (40%)= ₹(29,200)

Both can adjust this loss against other income (up to ₹2 lakh).