How to split property sale proceeds in joint ownership?

In Indian culture, a house is considered a must-have asset. It is closely tied to the idea of family legacy, just as values, customs, and traditions are passed down to future generations. Similarly, the tradition of jointly owning property with close family members, such as a spouse, is also deeply rooted in our culture. In real estate, joint ownership, or co-ownership, refers to the legal status of two or more individuals who own a property. It offers many benefits, such as shared financial responsibility, higher loan eligibility, and tax benefits, allowing each co-owner to claim certain deductions. However, at the time of the sale of jointly owned property, challenges may arise if there is a lack of clarity about the share each owner receives and the tax implications. In this guide, we explain the legal process for dividing property sale proceeds in a joint ownership.

Understanding joint ownership

Before understanding the share each co-owner can have, it is crucial to understand the different types of joint ownership in India. In India, joint ownership is mainly classified as:

• Tenancy in common: In this type of joint ownership, co-owners may hold equal or unequal shares, as agreed. A co-owner’s share can be transferred or inherited independently (without the consent of the other co-owners). In the event of the death of one of the co-owners, the share will be inherited by the heir rather than the other co-owner. 
• Joint tenancy: In a joint tenancy, each co-owner has an equal share and rights as the other co-owners. However, in the event of the death of one of the co-owners, the heir will inherit their share, as in a tenancy in common. If there is a will or another family arrangement, inheritance will be based on that arrangement. 
• Coparcenary: This pertains to the traditional form of joint ownership over ancestral property. In this system, both sons and daughters, whether married or not, can claim partition rights to the property.
• Joint Hindu Undivided Family Property: In this type of joint ownership, the head of the family, or Karta, assumes primary responsibility on behalf of all other members. 
• Tenancy by entirety: This applies to married couples, in which both spouses have equal claims to the property. If in the case of demise of one spouse, the surviving spouse will inherit the entire property instead of transferring to any third person. The co-ownership in a property is terminated in different scenarios such as:
  • Mutual agreement between the co-owners
  • Divorce (in case of married couples)
  • Death of one of the individuals

How to determine the share of each co-owner?

Legally speaking, unless a written agreement specifies each co-owner’s share, all co-owners will have an equal share in the property. Thus, two individuals purchasing a property together will have 50-50 share in the property. When entering into a joint property ownership, a proper agreement must be drafted. The financial contributions, responsibilities of each co-owner, dispute mechanism, exit strategies and the decision-making process should be clearly mentioned. One can approach an experienced legal professional to draft a co-ownership agreement. 

During a partition, transfer, or sale, the ownership proportion of each co-owner as stated in the sale deed is considered. 

Transfer of a jointly owned property

If any co-owner does not want to continue joint ownership, they can demand a partition of the property. This can be done either by physically dividing the property between the co-owners or the property is sold and the sale proceeds are distributed. A co-owner can transfer their share through proper documentation. In a joint tenancy where each co-owner has an equal share and rights, due consent must be obtained. In case of the death of a co-owner, the share of the individual is passed on as per their survivorship rights or succession laws.

What is the legal process to sell a jointly owned property? 

The process of selling a jointly owned property is similar to selling an individually owned property. However, there are a few crucial steps co-owners should understand before planning to sell. 

• The first step before the sale process begins is obtaining the written consent of all joint owners. Without the consent of all co-owners, there is a risk of property-related disputes. 
• The next important step is determining each co-owner’s ownership share. In case it is undefined and there is no proof to validate it, equal share is assumed as per the Indian property law. 
• The following process is similar to any property sale, including the drafting of the sale deed. The names of all co-owners should be listed in the document, with share proportions clearly specified, along with the division of the price and the payment process. 
• The agreement should be signed by the co-owners and witnessed. If any co-owner is unavailable to complete the process, they can use a registered Power of Attorney. 
• After the documentation, each co-owner should fulfil their tax responsibilities, including reporting income and paying tax on their share of the sale proceeds.

Tax implications of selling a jointly owned property

There is a tax deducted at source (TDS) applicable on a property sale transaction. TDS is deducted at 1% of the sale proceeds if the amount is more than Rs 50 lakh. The tax must be deposited with the income tax department. For jointly owned property, the tax deduction is calculated proportionately based on each co-owner’s share. As per Section 194 1A of the Income Tax Act, joint owners do not have to pay TDS in case the individual share is less than Rs 50 lakh. If one co-owner sells their share of the property, they must pay their TDS on the sale proceeds. 

When selling a jointly owned property, each co-owner must pay capital gains tax based on their share in the property. It applies as per the formula: 

Capital gains = Sale price – Indexed Purchase Price – Transfer Expenses.

The tax on profits earned from the sale of assets are classified as Long-term capital gains (LTCG) and Short-term capital gains (STCG). This is based on the property’s specific holding period. LTCG applies to property held for more than 24 months, with a tax rate of 20% with indexation or 12.5% without indexation, whereas STCG applies to property held for less than 24 months, with a tax rate determined by the income tax slab. 

Property owners are also eligible for tax exemptions under the following income tax provisions:

• Section 54: Investing in another residential property
• Section 54EC: Investing in bonds (per owner) up to Rs 50 lakh within six months 
• Section 54F: It is applicable when selling a non-residential property and buying a house

According to a recent ruling by the Income Tax Appellate Tribunal (ITAT), a married couple who sells two residential properties and jointly buys one property is eligible for LTCG tax exemption under Section 54.

Disputes in case of sale of property in joint ownership

It is important to navigate the property sale process by following the legal due process while adhering to tax laws. This even more necessary in joint ownership, otherwise it can give rise to disputes between co-owners. Conflicts arising over unequal distribution of sale proceeds is quite common. 

To avoid potential disputes, co-owners can take a few measures such as:

• Approaching a third party for mediation
• Filing a civil suit through court
• Filing a partition suit in the court to divide the property into individual share
• Seeking an injunction to prevent the property sale until the dispute is resolved

Co-owners can challenge a property sale in court and request the transaction be nullified. They also have the legal right to seek compensation in case of financial losses incurred due to any unauthorised sale.

Housing.com News Viewpoint

Sale of a jointly owned property without the consent of all the co-owners involved may give rise to serious legal complications for all the parties involved. Thus, it is crucial to be aware of co-ownership rights when purchasing any property jointly. Moreover, one should also have a thorough understanding of the legal processes and tax implications. Maintaining transparent communication and seeking professional legal guidance can help ensure a fair division of property.

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