A ‘benami’ property is one, where a property is purchased in the name of a person, who is not the real beneficiary. The person, in whose name the property is purchased, is known as a ‘benamidar’.
‘Benami’ literally translates to ‘without any name’. In the case of real estate transactions, a benami property is one, where the person actually paying money to buy a property, does not buy it in his/her own name. In such a transaction, the person who finances the purchase of the property is its real owner and not the person under whose name it has been purchased. A benami property is bought and held for the direct or indirect benefit of the purchaser of the property. As such, assets other than real estate can also be declared as benami, including gold, financial securities, legal documents and so on.
Taxes and penalties on benami properties
Benami properties attract penalties, not only under the benami laws, but also under the income tax laws. The ‘Benami Transactions (Prohibition) Act’ was passed in 1988, to eliminate corruption and black money. However, it was never implemented, as the necessary rules and regulations were not put in place. Now, with the passing of the ‘Benami Transactions (Prohibitions) Amendment Act, 2016, an effective law has been put in place, to deal with benami properties.
See also: Taxes and penalties on benami properties
Making an investment in another person’s name, has implications under the benami laws, as well as the income tax laws, for the benamidar and also the beneficial owner (the individual who provides the funds to buy the property in another person’s name).
Income tax implications for the beneficial owner (buyer)
According to Section 69 of the Income Tax Act, if any investment is made by a person, which is not recorded in the account books maintained by him, then, the value of such investments shall be deemed as income of the person who makes the investment and the same shall be taxed in the year in which such investments are made.
The source of funds for such investments can be explained, only if the purchase has been accounted for, in the books of accounts maintained by him. So, making an investment in a benami property has severe consequences. A benami property can be confiscated by the government, without giving any compensation for the same, in addition to the liability for penalty and prosecution, under the benami transaction laws. There is also the prospect of tax liability under the income tax laws, as well as penalty and prosecution.
Taxes on benami properties
Benami investments shall be taxed at a flat rate of 60 per cent. The person will also have to pay a surcharge of 25 per cent and education cess of three per cent, on the tax amount. The tax liability, after taking into account all the taxes and surcharge, will come to 83.25 per cent of the value of the investment.
Income tax implications for the benamidar
As the benamidar is the legal owner of the property, s/he will have to pay tax on the income that arises from such property. If the legal owner has more than one house property, all properties except one, are treated as deemed to have been let-out and the legal owner has to offer income on such properties, even if there is no income from such properties. Moreover, the benamidar can be held liable, for concealment of facts before the income tax authorities and for misstatement and therefore, can be liable for penalty under the Income Tax Act.