Capital Gains Exemption under Sections 82 & 86 of the Income-tax Act, 2025 ( Corresponding to Section 54 and 54F of the Income Tax Act 1961): Is Ownership of the New House More Important than the Source of Investment
Can Capital Gains Exemption be Claimed Where the New Residential House is Purchased in the Name of a Spouse or Family Member?
The Capital gains provisions relating to investment in a Residential House property is one of the most litigated areas under Income Tax Law. An issue that arises in practice is that, whether the exemption can be claimed only when the new Residential House Property be purchased in the name of the tax payer or whether the benefit will be available even if the property is acquired in the name of the spouse / children / legal heirs of the tax payer.
It is argued that since the exemption is available to the taxpayer on investment in a residential house, the property should be purchased and owned by the taxpayer claiming the exemption. Certain judicial authorities have also adopted this view and held that where the investment is made in the name of a person other than the taxpayer, the statutory conditions governing the exemption are not fully satisfied. Consequently, the Revenue has, in several cases, denied the exemption on the ground that the new residential property was not acquired in the taxpayer’s own name.
There are some judicial precedents wherein the exemption was denied on the ground that the investment in residential house property is made in the name of assessee’s spouse / children (other than assessee)
1. Jai Narayan v. ITO (Rajasthan High Court) [306 ITR 335] – The Court denied exemption where the new property was purchased exclusively in the name of the assessee’s wife and son and not in the name of the assessee.
2. Kalya v. CIT (Rajasthan High Court) [251 CTR 174] – A strict interpretation was adopted and exemption was denied where the investment was not made in the assessee’s own name.
However, a more liberal view has been considered by various High Courts stating that exemption can also be claimed even the investment is such residential house property is not in the name of the assessee as follows:
1. CIT v. Kamal Wahal (Delhi High Court) where in it was held that, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee’s wife.”
2. CIT v. Ravinder Kumar Arora, where in it was held that exemption should not be denied merely because the property is purchased in the name of the spouse provided that the investment should be made substantially from the funds of the tax payer.
3. CIT v. Natarajan (Madras High Court) [287 ITR 271] – Exemption allowed where the new property was purchased in the name of the assessee’s wife.
4. ITO v. Smt. Rachana Arora – Where in, the assessee sold a residential house property and invested the sale proceeds towards the purchase of another residential house property jointly with her daughter and son in law and her share being 34%. In this case, the AO restricted the exemption to her share. The Commissioner of Income-tax (Appeals) allowed the appeal of the assessee stating that the assessee had invested her entire sale consideration in the new property and, therefore, was entitled to exemption of the entire amount of Long-Term Capital Gains.
The issue of whether capital gains exemption can be claimed where the new residential house is purchased in the name of a spouse or other family member continues to be a subject of judicial debate. Although judicial precedents have generally favoured a liberal interpretation where the investment is made by the taxpayer, the absence of Supreme Court ruling directly resolving the conflict between the strict and liberal views means that the controversy cannot be regarded as fully settled. Consequently, purchase of the new residential house in the taxpayer’s own name continues to remain the most tax-efficient and litigation-free approach from a practical prespective.
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