Tax implications under Section 27 of the Income Tax Act

The Income Tax Act 1961 includes Section 27 that mentions deemed ownership in case of property transfer to a spouse and the tax obligations. The section aims to assess an individual’s tax obligation even if they do not legally own or have title to a property. The clause applies when property ownership is transferred to another individual but not recognised by the law. It aims to prevent the sale of properties to family members or relatives to avoid tax payments.

Click to read about the provisions of Section 24 of the Income Tax Act, which allows deductions on income from house property.

What is Section 27 of the Income Tax Act?

Section 27 of the Income Tax Act outlines the provisions for tax deductions on rental expenses, property repairs and rent collections. It specifies the rules and limitations for individuals and businesses seeking to claim deductions in these areas. The deductions help in calculating the taxable income and understanding one’s tax liabilities. Individuals and entities must be aware of the provisions of Section 27 to make informed financial decisions and avail of tax benefits under the Income Tax Act.

Section 27 of the Income Tax Act: Definition of owner

The term ‘owner’ is applied to any person who has the right to exercise ownership rights to earn income under this heading. However, a person who exercises ownership rights on behalf of another person will not be considered an owner.

• A property buyer is authorised to exercise owner rights and is considered an owner, even if the registered document has yet to be executed in their name.
• The owner of a building will be considered as the owner concerning structures built on leasehold land, even if they are not the owner of the land on which the building is located.
• The same is applicable even if the building is provided to the lessor when the lease is over.

Who are deemed owners of house property?

According to Section 27 of the Income Tax Act, the following individuals are considered owners for Sections 22-26:

• A person who transfers, otherwise than for adequate consideration, any house property to a spouse, not being a transfer relating to an agreement to live apart or to a minor child not being a married daughter, is considered to be the owner of the transferred property.
• An individual is not considered the owner of a property if he gives money to his spouse and the spouse uses the money to purchase a house. However, clubbing rules may apply to the revenue from such a property. The rule of deemed let-out does not apply in case of property transfer to a son or daughter-in-law. If a house is self-occupied, it will be added to the son/daughter-in-law’s account and the person will be exempt from the deemed-to-be let-out property provision. The transaction is covered by the clubbing clause, however, since the daughter-in-law will be residing in the house, no income will be generated from the property.
• An individual will not be considered the owner of the house in case it is transferred to a minor child without offering due consideration.
• If the property is transferred to a minor married daughter, the transferor will not be considered the owner. An adult who provides money to a minor child for the purchase of a house will not be considered as the property’s legal owner. However, clubbing rules may apply to the profits from such a property.
• The holder of an impartible estate will be the individual owner of all properties within the estate. The provision is applicable in case of taxation of income from an impartible estate. An impartible estate refers to a property that cannot be divided or partitioned among the family members.
• The owner of the impartible estate is regarded as a taxable entity for the income gained by the estate. Such income, including rent, agricultural income, etc., is assessed in the hands of the holder, who is liable to report and pay taxes.
• A member of a cooperative society, company or other association of persons to whom a building or part is allocated or leased through a house building scheme of the society, company or association will be deemed to be the owner of that building or part thereof. As per the law, for a member of a cooperative society, any income gained from the membership, including dividends and profits, is subject to taxation. The income from cooperative societies is calculated under the head ‘Income from Other Sources’.
• The presumed owner of a residential property is an individual who is allowed to take possession of a building or a part of it in partial fulfilment of a contract of the kind described in Section 53A of the Transfer of Property Act. An individual will be considered the owner even if the property is not registered in the buyer’s name. This is applicable in the following situations:

• • Possession of the property has been transferred to the buyer
  • The sale payment has been paid to the seller
  • The buyer has committed to make the payment and the sale deed is yet to be signed, unlike a power of attorney, agreement to sell or will
  • A written contract

• Section 27 (iiib) of the Income Tax Act mentions the taxation of persons with rights in a property for not less than 12 years. This is used for calculating the income earned by such individuals from their rights in the property. According to Section (iiib), if a person has been holding a property right for at least 12 years, any income from the property, such as rent, lease payments, etc., is subject to taxation. The person is liable to report and pay taxes on the income that will be considered under the head ‘Income from House Property’ or ‘Income from Other Sources’, depending on the nature of the income.

Tax implications of being a deemed owner under Section 27 of the Income Tax Act

• Tax liability: An individual deemed an owner, according to Section 27, is liable to report and pay income taxes on the income, such as rental income, profits from the sale of property and other earnings generated from the property.
• Calculation of total income: The income gained from the property is included in the person’s total income and will be taxable at the applicable rates.
• Applicable heads of income: Income earned by an individual comes under various heads for taxation purposes, depending on the nature of the Rental income from a property is calculated under the head ‘Income from House Property’ while profits from the sale of property come under the head of ‘Capital Gains’. The correct classification is necessary for accurate reporting and tax calculation.
• Tax deductions: A property owner may be eligible for certain deductions to offset the taxable income derived from the property, which helps reduce tax liability. One can claim deductions for expenses related to property maintenance, repairs or mortgage interest payments.
• Compliance and documentation: Deemed owners of a property are required to maintain documents related to property transactions, such as records of rental income earned, expenses incurredand property sale/purchase documents. This is necessary to ensure compliance with tax laws and accurate reporting of income.
• Reporting and filing requirements: Deemed owners of a property must fulfil the requirement of specific reporting and obligations, such as filing income tax returns, disclosing property-related information and furnishing supporting documents to the tax authorities. Failure to comply with these regulations can result in legal consequences and penalties.
• Capital gains tax: Capital gains tax is imposed on the profits gained from the sale if a property is sold. Taxation is based on several factors, including the holding period of the property, the type of assetand exemptions or applicable concessions.

Housing.com News Viewpoint

When engaging in property transactions, it is essential to understand the provisions of Section 27 of the Income Tax Act of 1961 to understand the tax liabilities and accurate tax reporting and calculation. Section 27 clarifies the different situations when a person may be considered the owner of a property, even if they do not have legal ownership or title. However, Section 27 does not allow people to transfer ownership of their assets to family members or other parties to avoid tax payments on those properties.

Individuals deemed owners under Section 27 should be aware of the tax implications and ensure compliance with the tax laws to avoid penalties. One can approach a tax expert or a legal professional to gain clarity on the various conditions of deemed ownership of a house and the tax implications.

FAQs