Buying a property is a preferred investment option in India. A property can be owned solely by an individual or co-owned by two or more individuals. People often prefer to purchase a property with their spouse. Jointly owning a property can be beneficial for tax advantages and stamp duty rebates. However, one should be aware of the tax liabilities of jointly owned properties.
When understanding the tax implications of rental income or capital gains on a jointly owned property, one must consider factors, such as the percentage share of co-owners, contribution towards the property cost and the intent of joint purchase.
In this article, we will discuss the tax liabilities of the co-owners of a jointly owned property.
What is a jointly owned property?
Jointly owned property refers to a property held under the name of two or more individuals. The individuals may or may not be related – they can be business partners, family members or any other combination that justifies a joint property purchase. If a husband and a wife own a property together, the ownership of assets comes under marital status. Under joint ownership, both parties have equal liabilities and rights to the property. Each co-owner must comply with the TDS rules and regulations applicable to the sale, purchase and renting of the property.
Benefits of jointly owning a property
Tax benefits
Joint ownership allows owners various tax benefits. For instance, a husband and a wife opting for a joint home loan get tax benefits on the principal and interest paid. Under Section 80C of the Income Tax Act, 1961, each owner can avail of a deduction of Rs 1.5 lakh on principal repayment and up to Rs 2 lakh each on loan interest from the house property income. However, each individual must pay taxes separately for all transactions.
Stamp duty rebate
Several state governments provide rebates on stamp duty for women homebuyers, enabling them to take ownership jointly or individually. The stamp duty rate is reduced by 1-2% if one is purchasing a property jointly with their wife.
Affordability
Given the increasing property prices across cities, applying for home loans jointly can significantly reduce the financial burden. With a combined income, couples applying for joint home loans become eligible for higher loan sanction amounts.
Succession
In single ownership, the property transfer process is time-consuming and may pose challenges when the owner dies. Jointly owning a property with a spouse makes the process simpler and less complex.
Income tax rules on jointly owned properties
The Income Tax Act has divided tax entities into various categories. All individuals are taxed under the category of an ‘Individual’. However, if more than one people together own a building, they may be taxed as a partnership firm, an association of persons (AOP) or a body of individuals (BOI).
With respect to property jointly owned by co-owners, Section 26 of the Income Tax Act gives clear guidelines for taxation of the share of such co-owners in a building. The share of income in the property, may be either in the form of rentals or may even be capital gains arising at the time of sale of such building. The section provides that in case the share of each of the co-owners is clearly defined and is ascertainable, then, the respective share of each co-owner shall become taxable in their hand as an individual and not as a BOI or AOP or partnership.
It may be pointed out that the building owned by an HUF is not a property that is owned jointly but the same is owned by the HUF in its own capacity. Thus, the income of such HUF property shall be taxed in the hands of the HUF as a separate tax entity and will not be apportioned among the members of the HUF.
See also: Why you should buy a property in joint names?
How is the share of each co-owner ascertained?
If the husband and the wife’s names are added to the agreement as purchasers of a property, they may have varying shares in the property. At times, additional persons are added to the agreement for the purpose of ensuring smooth succession of property. So, the respective share of the co-owners in the property will be in the ratio in which they have contributed towards the cost of the property.
The cost may either be by way of a down payment, or it may also be by way of their ratio in the home loan taken. This can be ascertained from the bank statements of the co-owners. Hence, if you have not contributed anything towards the purchase consideration, you will not be treated as a co-owner of the property for income tax purposes, even when your name appears in the agreement as a buyer of the property.
Ascertaining share in case of inheritance
The property may also be acquired by way of inheritance, either under a will or by way of intestate succession. In the case of a will, the ownership ratio shall be decided on the basis mentioned in the will of the testator. If the property is jointly inherited, otherwise than under a will, the ratio of ownership will be as per the law of succession applicable to you, based on your religion. However, in case some of the legal heirs have relinquished their right to the property by mutual consent, the ownership ratio shall stand modified to that extent.
Issues encountered when ascertaining share in jointly owned properties
Determining the share of co-ownership of a house has often posed challenges. For instance, the husband and wife may have been specified as equal co-owners in the purchase agreement for a property, but the entire cost could be borne only by one of them. This can happen if the wife, for example, is a homemaker and does not have an income source. In such scenarios, tax can be applied to the husband’s entire income from such property (whether it is annual rental income or capital gains income at the time of sale). This is allowed under the clubbing provisions of income tax laws.
On the other hand, there could be a scenario where both the husband and the wife have independent income sources and contribute towards the cost of the house property, but their individual share in the joint property is not specified. In such cases, income from the house property must be taxable in the ratio of the capital contribution to the cost by both individuals. This is allowed as per Section 45 of the Transfer of Property Act.
Under the same provision, any loss incurred from the property, in the form of interest paid on a home loan or loss at the time of sale, must be attributed to both owners.
However, one should note that taxation of income from a jointly-owned house property often becomes a matter of litigation. Thus, taxpayers must adopt a cautious approach to prevent a negative outcome.
The Delhi’s Income Tax Appellate Tribunal (ITAT) recently stated that if the purchase agreement does not specify the percentage of ownership of husband and wife, both must be treated as equal owners of the property for taxation purposes.
Taxation of rental income in a jointly owned property
Under the tax laws, one can have one house as self-occupied, on which there is no tax liability. However, if there is more than one jointly owned properties used for self-occupation, one has to choose one property as self-occupied and the rest will be treated as having been let out.
For properties deemed to have been let-out, one has to offer the notional rent. This is the amount for which the property is reasonably expected to be let-out, for taxation. Such notional rent is apportioned in the ratio of ownership, as ascertained on the basis discussed above.
For a property that is actually let-out, the rent received is required to be apportioned in the ownership ratio as determined. The rent so apportioned, is treated as the annual value of the property, from which, a flat standard deduction of 30% of the rent, either actually received or notionally computed, is made, to arrive at the taxable value of the rent. In addition to the standard deduction, you are also allowed to deduct any amount of interest paid on money borrowed for the purpose of buying, constructing or repairing or renovating the building, which then becomes your taxable income under the head ‘Income from house property’.
See also: Know all about wife’s share in husband property after death
Tax implication in cases where joint owner’s shares are not mentioned in sale deed
If a registered sale deed does not specify the extent of holding in the property, both the husband and the wife would be understood to have an equal share in the rental income and would be taxed accordingly, the Delhi Bench of the Income Tax Tribunal said in an order dated January 5, 2023. Each party will thus be liable to pay tax on 50% of the income from house property. The same, however, is not true if the wife is a homemaker and has no independent sources to earn money.
Taxation of profit on sale of the jointly owned property
If the co-owned property is sold, each co-owner has to offer the capital gain as applicable on his share of the building. It may be noted that the apportionment shall be made at the ‘sale consideration’ and ‘cost of acquisition’ level and not at the ‘net taxable capital gains’ level. So, in the case of long-term capital gains on sale of the jointly owned property, whether commercial or residential, each one of the co-owner shall be entitled to claim exemption under Section 54EC, by investing the indexed capital gains up to Rs 50 lakhs. So, the limit up to which investment in specified bonds can be made under Section 54EC, will be applicable in case of each co-owner and not for the property as a whole.
Likewise, the conditions of not owning more than one residential house as prescribed under Section 54F for claiming exemption from long-term capital gains, shall also be considered for each of the co-owners and not for all the co-owners taken together.
Under Section 54GB, one can avail of an exemption of up to Rs 1 crore from any long-term capital gains earned on the sale of a residential property if the amount is invested in a specific infrastructure project within a period of three years of the sale.
See also: All about ancestral property
TDS on sale of property for joint owners
In 2018, the Delhi bench of the income tax tribunal ruled that joint buyers will not be liable to pay any TDS under Section 194 1A, if the share of the individual is less than Rs 50 lakhs. The order by the tribunal came, while passing its judgment in a case of one Vinod Soni. While passing the order, the tribunal also noted that since each transferee was a separate individual, the purchase consideration paid by each will be the determining factor for the applicability of Section 194-1A.
Rules for TDS on property sale of joint owners
- According to the tax regulations, income tax is levied individually on each owner and not collectively.
- Each co-owner, as per the registration documents, will have legal and equal ownership of a residential property.
- When a property is jointly purchased by two or more parties, they are eligible for tax deductions on the interest and the principal amount. Under Section 80C, each owner can avail of tax deductions of up to Rs 1.5 lakhs on the principal amount and up to Rs 2 lakhs on the interest amount.
- Each buyer should have legal documents, including PAN. However, the buyers do not require a TAN (Tax Deduction Account Number).
- TDS deduction at the rate of 1% is appliable, however, the rate goes up to 20% if one does not have PAN.
Property bought in the housewife’s name is a joint family asset: HC
Property bought by a husband in the name of a housewife with no independent source of income will be categorized as the family’s joint property, the Allahabad High Court (HC) ruled. Such property, prima facie, becomes the property of the joint Hindu family, the HC said in an order dated February 15, 2024.
Giving its order in the case of Saurabh Gupta who had filed a civil suit, asking for a declaration of co-ownership of his deceased father’s property, Justice Arun Kumar Singh Deshwal said that it was common for husbands to buy property in the name of their wives. In his appeal, Gupta contended that despite being officially registered in the name of his mother, the property was jointly shared because it was bought by his father using his funds.
‘This court under Section 114 of the Indian Evidence Act may presume the existence of fact that the property purchased by a Hindu husband in the name of his spouse, who is a homemaker and does not have an independent source of income, will be the property of family, because in common course of natural event Hindu husband purchases a property in the name of his wife, who is homemaker and does not have any source of income for the benefit of family,’ the court observed.
Unless proved that the property was purchased with the income earned by the wife, the property will be deemed to have been purchased by the husband using his income, the high court added.
Housing.com News Viewpoint
If you own or plan to own a property jointly, make sure you adhere to the TDS rules applicable to rental income and capital gains on the sale of jointly owned property. When a property has more than one owner, it is necessary to determine the share of the co-owners based on which the TDS payments and tax liabilities are distributed. Taxpayers need to keep proper records of their capital contribution towards a jointly owned property. One should ensure consistency in terms of reporting income in individual tax returns throughout ownership and at the time of sale. Co-owners must be able to justify the intent of buying a property jointly along with relevant documents, which will support their case when ascertaining their share. If you own or plan to sell a jointly owned property, you can approach a tax expert or legal advisor to gain a proper understanding of your tax liabilities and exemptions.
FAQs
How do I calculate capital gains tax on joint property?
If the co-owned property is sold, each co-owner has to offer the capital gain based on his share in the purchase. It may be noted that the apportionment shall be made at the ‘sale consideration’ and ‘cost of acquisition’ level and not at the ‘net taxable capital gains’ level.
What are the tax exemptions available on the capital gains earned from joint property?
In the case of long-term capital gains on the sale of jointly owned property, whether commercial or residential, each co-owner shall be entitled to an exemption under Section 54EC, by investing the indexed capital gains up to Rs 50 lakhs.
How is the share of co-owners fixed in a joint property?
The respective share of the co-owners in a property is the ratio in which they contributed towards the property cost.
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