Taxation On Jointly Owned Property- Most people buy immovable properties in joint names for a variety of reasons, including funding and seamless inheritance. We review the provisions for taxing such jointly owned property.
The Income Tax Act classifies tax entities into several types. Individuals are all taxed as ‘Individual’. However, if multiple people get together to buy a building, they may be taxed as follows:
- A partnership firms
- An association of persons (AOP)
- A body of individuals (BOI)
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Section 26 of the Income Tax Act provides explicit principles for the taxation of co-owner’s shares in a building. The share of revenue in the property may be in the form of rentals or capital gains deriving from the sale of the building. The clause states that if each co-owner’s share is clearly defined and ascertainable. Their separate portion will become taxable in their hands as individuals rather than as a BOI, AOP, or partnership. It should be noted that the building owned by a HUF is not a joint property; rather, it is owned by the HUF in its own capacity. Thus, the income from such HUF property will be taxed in the hands of the HUF as a separate tax entity, rather than being divided among the HUF’s members.
What exactly is a jointly owned property?
A jointly owned property is one that is held in the names of two or more people. Individuals may or may not be connected; they could be business partners, family members, or any other combination that justifies jointly owning property. If a husband and wife own a property together, the ownership of assets is considered marital status. Joint ownership gives both parties equal duties and rights to the property.
Each co-owner must follow the TDS rules & regulations governing the sale, acquisition, and rental of the property. One should also keep track of the TDS deductions.
What is the capital gains tax on the sale of jointly-owned property?
Any profit or gain coming from the sale of a capital asset. Such as real estate, is referred to as income from capital gain, and it is taxable and known as capital gains tax. The taxation applies in the year the property is transferred. Jointly owned properties are taxed individually. Each co-owner of the property must pay taxes on their portion of the property’s revenue and capital gains.
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How is the share of each co-owner determined?
If the husband and wife’s names are added to the agreement as purchasers of a property, they may own different portions of the property. Additional parties are occasionally added to the agreement to ensure that property succession proceeds smoothly. As a result, each co-owner’s part of the property will be proportional to their contribution to the property’s cost.
The cost may be in the form of a down payment or a ratio in the home loan. The co-owners’ bank statements provide evidence of this. As a result, if you did not contribute anything to the purchase price. You will not be considered a co-owner of the property for income tax reasons. Even if your name appears in the agreement as a buyer.
The property can also be acquired through inheritance, either through a will or intestate succession. In the case of a will, the ownership ratio shall be determined in accordance with the testator’s will. If the property is inherited jointly, rather than through a will. The ownership ratio will be determined by the law of succession that applies to you, based on your religion. However, if some of the legal heirs have abandoned their rights to the property by mutual consent, the ownership ratio will be changed accordingly.
Taxation of rent received on jointly held property
In the event of self-occupied, jointly owned property, the tax laws allow you to claim one residence as self-occupied and have no tax burden. However, if more than one jointly owned property is utilised for self-occupation. You must select one property as self-occupied and classify the others as having been let out. You must offer the notional rent on such premises that are judged to have been rented out. This is the amount that the property is reasonably expected to be let out for tax purposes. Such notional rent is apportioned in the ownership ratio, which is determined using the methods outlined above.
For a property that is genuinely rented out, the rent collected must be included in the ownership ratio as computed. The apportioned rent is treated as the annual worth of the property, and a flat standard deduction of 30% of the rent. Either actually received or notionally computed, is made to determine the taxable value of the rent. In addition to the standard deduction, you may deduct any amount of interest paid on money borrowed for the purpose of purchasing, constructing, repairing, or remodelling the structure, which constitutes taxable income under the heading ‘Income from house property’.
Assessee is subject to equal tax on income from residential property when joint owner’s shares are not indicated in the sale document.
If a registered sale deed does not specify the amount of holing in the property, the husband and wife are presumed to have an equal share of the rental income and are taxed accordingly. According to a ruling issued by the Income Tax Tribunal’s Delhi Bench on January 5, 2023. As a result, each partner will be required to pay taxes on 50% of their income from residential property. The same is not true if the wife is a housewife with no other sources of income.
Taxation of profit on the sale of jointly owned property
If the co-owned property is sold, each co-owner must pay the capital gain based on his part in the building. It should be emphasized that the apportionment will be made at the ‘sale consideration’ and ‘cost of acquisition’ levels, not the ‘net taxable capital gains’ level. So, in the case of long-term capital gains on the sale of a jointly owned property. Whether commercial or residential, each co-owner may claim an exemption under Section 54EC by investing the indexed capital gains up to Rs 50 lakhs.
As a result, the limit under Section 54EC on the amount of investment in designated bonds will apply to each co-owner rather than the entire property.
Similarly, the restrictions of not owning more than one residential dwelling. As required under Section 54F for claiming exemption from long-term capital gains. Must apply to each co-owner individually rather than to all co-owners collectively.
Section 54GB allows for an exemption of up to Rs 1 crore on any long-term capital gains obtained on the sale of a residential property. If the funds are invested in a designated infrastructure project within three years of the sale.
TDS on sale of property for joint owners.
In 2018, the Delhi bench of the Income Tax Tribunal declared that joint buyers will not be required to pay any TDS under Section 194 1A if the individual’s share is less than Rs 50 lakh. The panel issued the ruling while reaching judgement in the case of Vinod Soni. While issuing the order, the tribunal also stated that because each transferee was a separate individual. The purchase amount paid by each will be the determining factor for the application of Section 194-1A.
TDS rules on property sales by joint owners
- According to tax regulations, income tax is levied individually on each owner rather than collectively.
- Each co-owner, according to the registration paperwork, will have legal & equal ownership of a residential property.
- When two or more parties jointly purchase a property, they are entitled for tax breaks on both the interest and the principle. Section 80C allows each owner to claim tax deductions of up to Rs 1.5 lakh on the principal amount as well as up to Rs 2 lakh on the interest amount.
- Each buyer should have legal documents, including the PAN. However, buyers do not need a TAN (Tax Deduction Account Number).
- TDS deduction is allowed at a rate of 1%, however if PAN is not provided, the rate increases to 20%.
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If you own or intend to own a property jointly with others, make sure to follow the TDS regulations that apply to rental income & capital gains on the sale of jointly owned property. When there is more than one owner of a property, the proportion of co-owners must be determined in order to distribute TDS payments and tax liabilities. If you own or intend to sell a jointly-owned property. Consult a tax expert or legal advisor to better understand your tax duties and exemptions.
News update.
Property purchased under a housewife’s name is a joint family asset. HC
The Allahabad High Court (HC) has held that property purchased by a husband in the name of a housewife with no independent source of income shall be considered joint property of the family. In an order dated February 15, 2024, the High Court stated that such property becomes the property of the combined Hindu family.
In a civil suit filed by Anil Gupta seeking declaration of co-ownership of his late father’s property. Justice Arun Kumar Singh Deshwal stated that it was customary for spouses to purchase property in their wives’ names.
This appeal, Gupta claimed that, despite being formally registered in his mother’s name, the property was jointly owned because it was purchased by his father with his own finances.
As per the Indian Evidence Act, Section 114, the court has the authority to assume that property bought by a Hindu husband in the name of his spouse. Who works as a homemaker and lacks an independent source of income, will belong to the family. This is because it is a common occurrence for a Hindu husband to purchase property in the name of his spouse. Who is a homemaker and has no source of income, for the benefit of the family.
Unless it is proven that the property was purchased using the wife’s salary. The husband will be presumed to have purchased it with his own money, the high court noted.
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