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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 come together to own a building, they may be taxed like:
- A partnership firm
- An association of persons (AOP)
- 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 a 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.
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 in 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 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.
The property may also be acquired by way of inheritance, either under a will or by way of intestate succession. In 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 in the property by mutual consent, the ownership ratio shall stand modified to that extent.
Taxation of rent received for jointly owned property
In the case of self-occupied, jointly owned property, the tax laws allow you to have one house as self-occupied, on which there is no tax liability.
However, in case more than one jointly owned properties are used for self-occupation, you need to choose one property as self-occupied and the rest are treated as having been let out. For such properties, which are deemed to have been let-out, you have 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’.
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.
TDS on sale of property in case of 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.
(The author is a tax and investment expert, with 35 years’ experience)
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 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.
What are the tax exemptions available on capital gains earned from joint property?
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 an exemption under Section 54EC, by investing the indexed capital gains up to Rs 50 lakhs.
How the share of co-owners is fixed in a joint property?
The respective share of the co-owners in the property will be in the ratio in which they have actually contributed towards the cost of the property.