Generally, we buy immovable property in name of our family members to get saved from various legal obligations and to take advantage of various tax exemptions. While most of us are unaware of the fact that such holdings can lend us in various tax problems. It is also not clear to most of us that whether income from such holdings is taxable or not, and if taxable, in hands of whom? or whether such tax can be bought into exemption bracket or not ?.
To get you a better understanding of all this, here we have defined a short guide on“ Taxing of Jointly Owned Property” based on the current tax provisions as postulated by the Income Tax Department.
Taxability of a Joint Owner
As per Income tax act, each entity is to be given special distinction for tax purposes. While it clearly states that every individual whether being the owner of a proprietorship firm, member of any partnership entity, salaried individual etc would be held taxable only and only for the income chargeable in his/her hand i.e. received by him from different sources.
Taking in joint ownership of an individual in any property, Section 26 of the act clears all relevant facts, that ownership in any property by any individual is not a concern for department at all while income from such ownership whether income in the form of rentals received, income from capital gains, income as received by him on sale of his share or sale of complete property or any other income from such property during a financial year is held taxable in hands of the recipient . Income from such sources would be taxed according to the applicable slab rate of the owner and all recipients receiving benefit from such property.
Note: Being an individual entity as separate from its members, a HUF (Hindu Undivided Family) can hold property in its own name (i.e. jointly owned property with members) being consideration paid by members or through banking of HUF. While any income arising from such property would be held taxable completely in hands of the HUF only as a separate legal entity and is not to be declared separately by its members.
Income Determination of Co-Owner
The share of any individual in the property cannot be considered as equal always, to know the actual share of owners in the property it is necessary that the cost value of the property is determined. Based on the cost value, the amount as contributed by the owner and co-owners in the property specifies their ownership share. To divide the cost among the co-owners one can look into
-All payments made by co-owners for purchasing such property as reflected by their bank statement.
-Loan Statement if any, taken for purchasing such property by co-owners in mutual understanding.
Thus, to be a taxable co-owner, it is necessary that you contribute some amount as purchase consideration for getting ownership in any property. If no amount is paid, then ownership in the property would be considered void even if the names of the owners and co-owners lie on the property agreement.
If a property is acquired by will or by way of inheritance among the family members, the ratio of ownership in the property would be decided on the basis of legal proofs and mutual consent of co-owners.
Taxability of Rental Income for Jointly Owned Property
As per Income tax act, it is necessary that you occupy only a single house for personal accommodation and specify income to the department from all other properties. For other property which is deemed to be let out are expected to give some notional rent as income to the owner. Such rental income is taxable in a proportion in hands of owners and co-owners in the property. The annual value of rent received from the property is treated as the annual realizing value of the property on which a flat 30% is imputed to arrive at the taxable value of the rent. While certain deductions like interest paid on a home loan or interest on loan paid for construction, repairing, building etc of such property can be deducted to arrive at cumulative taxable income figure to be included in “Income from House Property” head of the recipient.
Taxability of Profits and Gains on Sale of Jointly Owned Property
If the property so owned in co-ownership is sold, the difference in the amount of the realized value and cost of acquisition as computed would be treated as capital gain of the beholders and has to be offered by co-owners to the department. In case of long-term capital gain in such property, each co-owner are entitled to claim exemption under Section 54EC for reinvesting the indexed capital gain in some other property or investment up to Rs 50 lakh. Also, deductions u/s 54F is also available to claim for co-owners, restricting their ownership to the single residential property.