Capital Gain Tax Exemption – Jointly Owned Property

“Explore the nuances of Capital Gain Tax Exemption on jointly owned property in India. Understand statutory provisions under Section 54 and Section 54F, judicial pronouncements, and salient features for tax-savvy property transactions. Stay informed to optimize your tax benefits.”

It is a very common scenario in India to buy house property in a joint name. There may be many reasons to add a spouse’s / children’s name as a joint holder i.e., smooth succession, easy transfer of property to children, etc.

The basis of apportionment of capital gains in the hands of the co-owners, where the share is not defined, has not been specifically prescribed in the Income Tax Act, 1961 (the Act).

In this article, an attempt has been made to discuss & get guidance from various judicial pronouncements on Capital Gain tax exemption on sale of jointly owned property.

2. Statutory Provisions: Section 54 & Section 54F of the Income Tax Act deal with the exemption of Capital Gain from the transfer of Long-Term Capital Assets.

2.1 Section 54 of the Act: – The Capital gain arises from the transfer of a long-term Residential House is exempted if, the assessee (a) purchases a residential house within one year before or two years after the date of transfer or (b) constructs one residential house within three years after the date of transfer.

2.2 Sec 54F of the Act: – The capital gain arises from the transfer of any long-term capital asset, not being a Residential House and the assessee has, within one year before or two years after the date on which the transfer took place purchased, or has within three years after that date constructed, one residential house. The capital gain shall be dealt with in accordance with the following provisions of this section: –

(a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) Provided that nothing contained in this sub-section shall apply where the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.

2.3 Section 54 deals with exemption from capital gain arising from residential house property whereas Section 54F deals with exemption from capital gain on transfer of other Capital Assets if investment is made in property for residential use. Provided that an assessee does not ‘own’ more than one residential house on the date of transfer (as per proviso (a)(i) to section 54F (1)). No such condition exists under section 54.

3. Salient Features of Capital Gain Tax Exemption on Sale of Jointly Owned Property

(a) Each co-owner should be liable to pay tax on the capital gains arising from the sale of the property, in proportion to the percentage of their respective investment in the property

(b) The apportionment shall be made at the ‘sale consideration’ and ‘cost of acquisition’ level and not at the ‘net taxable capital gains level.

(c) The conditions of not owning more than one residential house (as prescribed under Section 54F) for claiming exemption from long-term capital gains must also be considered for all co-owners separately.

(d) Exemption under section 54/ 54F will be available to the co-owners in the ratio in which they have contributed towards the cost of the property. Capital gains exemption will not be limited to the share of ownership.

(e) The exemption is available even on the purchase/ construction of a portion of a house.

(f) The house purchased doesn’t need to be a new house. The exemption is available even house is purchased from co-owners and the assessee is already staying in the house.

Relevant Judicial Pronouncements

4. Capital Gain Tax on sale of Jointly Owned property If the property is held jointly and both the co-owner file the return and report Capital Gain, the tax will be levied in proportion to their share in the property. – Sec 54

4.1 In the case of Jitendra V Faria v. Income-tax Officer, 18(2)(1), Mumbai, it was held by ITAT MUMBAI BENCH ‘SMC’ that it is not justified to tax the entire capital gain on the sale of old property in hands of the assessee when 50 percent of the old house was owned by his wife and she had paid capital gain separately for her share of the house.

5. Exemption under Sec 54F – Ownership of more than one house: Where a residential property is jointly owned by two persons that would not preclude an assessee from claiming exemption under section 54F, as the assessee would not be hit by proviso to section 54F being not an exclusive owner of residential property.

5.1 Merely on the fact that said property was co-jointly owned by the assessee and his wife, the assessee could not be treated as the ‘absolute owner’ of said property and, thus, the claim of deduction under section 54F could not be denied. – Held by THE ITAT MUMBAI BENCH ‘SMC’ in Anant R Gawande v. Assistant Commissioner of Income-tax

6.1 Property investment registered in spouse’s name is eligible for exemption under section 54. There is no requirement that investment should be made in the name of the assessee only.

6.2 It is held by the High Court of Karnataka in the case of International Taxation v. Mrs. Jennifer Bhide (supra) that, to attract section 54 what is material is, the investment of sale consideration in acquiring the residential premises or constructing the residential premises. Once the sale consideration is utilized for the purpose mentioned under section 54, the assessee is entitled to the benefit of the said provisions.

6.3 Thus, it has been categorically observed that the assessee cannot be denied the benefit of deduction under section 54 of the Act even though the assessee has purchased the property jointly with her spouse.

6.4 Brief Facts of the Case: The assessee sold her residential property and invested part of the sale proceeds in purchasing residential house property. The property was purchased in the joint names of the assessee and her husband. The entire investment was made by the assessee and no contribution was made by her husband.

6.5 Assessing Officer held that only 50 percent of investment was to be allowed as exempt in the hands of the assessee.

6.6 It was held, merely because , in the sale deed her husband’s name was also mentioned, in law, he would not have any right, or the assessee could not be denied the benefit of deduction of aforesaid amount on that ground.

7. The payment for new property should flow from the assesse’s account for claiming benefit: Where the assessee sold the flat and invested his share in another property, the assessee having made the entire investment for the purchase of a new residential house, along with stamp duty and registration charges, he will be entitled to full exemption under section 54 even though the property was purchased in joint names of the assessee and his brother. – Jitendra V Faria v. Income-tax Officer, 18(2)(1), Mumbai

8. Purchase of undivided share in a residential house The Act enables an assessee to get exemption from payment of tax in respect of the purchase or construction of a portion of the house

8.1 It is held by the HIGH COURT OF GUJARAT in the case of Commissioner of Income-tax v. Chandanben Maganlal that when there is a doubt about the meaning of any statutory provision, the provision is to be understood in the sense in which it can harmonize with the subject of the enactment and the object which the Legislature has in view. In view of the said principle, it is very clear that when the Legislature has desired to give an exemption to an assessee who is selling his residential house to purchase another residential house, one cannot interpret the provision in a manner that would disentitle the assessee to claim the exemption under the section merely because the assessee could not purchase the residential house in toto and the assessee purchased only a portion of the house.

8.2 It is possible that a person may not be in a position to purchase the whole residential house at a time and in the circumstances an assessee might purchase a portion of the house or some interest in the house.

8.3 In the circumstances, merely because the assessee had purchased 15 percent of the undivided share in a residential house, the assessee would not be disentitled from making a claim for exemption under section 54

9. Purchase of a residential house used by the assessee for his residence before the purchase In the case of Commissioner of Income-tax v. Chandanben Maganlal, the assessee, after selling her house, purchased 15 percent interest in a house property owned by her husband and her son. The assessee was also living in that house and continued staying after the purchase of 15 percent interest.

9.1 It was held by the High Court of Gujrat that when there was a bona fide purchase, the exemption under section 54 cannot be denied merely because the assessee was residing in the same house for which she has invested the sale proceeds for the purpose of capital gain exemption

9.2 Section 54 nowhere states that a residential house which is purchased by an assessee, to enable her to get exemption under the provisions of section 54 should not be the one in which the assessee was residing. When the section does not put any such embargo, it would be absolutely against the settled principles of interpretation of the statute to read such an intention of the Legislature to deprive an assessee of getting an exemption under section 54.

9.3 If there is a bona fide purchase, the revenue cannot be permitted to say that the assessee is not entitled to exemption under the provisions of section 54 merely because the assessee was residing in the house which was purchased by the assessee.

10. It is not necessary that the house purchased should be new; even the purchase of a house from co-owners will satisfy the condition and the assessee will be entitled for exemption under section 54/54F- CIT v. T.N. Aravinda Reddy [1979].

Disclaimer: The article is for educational purposes only.

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