It is very common to purchase property in the name of our close relatives like spouse, children, parents and siblings. However it is important for us to understand from the legislative perspective, are we allowed to purchase the property in name of our relatives? If we are allowed to purchase the property on behalf of our close relative, the next question arises – what would be the tax treatment for relatives as well as for the person purchasing property in the name of relative. In this article both the aspects will be covered in a summarised manner.
From legislative point we need to look at Benami Transactions (Prohibition) Amendment Act, 2016 (“the Act”).
Benami Transaction means a transaction which is affected by a person in the name of another person. The person transacting “Benami Transaction” is called “Beneficial Owner” and the person in whose favour transaction held is called “Benamidar”.
Section 2(9) of the Act: “benami transaction” means, —
A) a transaction or an arrangement—
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration except when the property is held by-
(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or…
If we look from ‘close relative’ perspective then we need to check clause no. (iii) and (iv) of the above mentioned section. A transaction would said to be Benami transaction if the payer of the consideration does not register property in his own name and gets it registered in some other person’s name. The provisions of section 2(9) are quite rigid and hence government has made certain exception to it i.e. in clause (i) to (iv). If a person purchases a property in the name of another person and if it gets covered in clause (i) to (iv), then the transaction will not be a benami transaction.
Under the exceptions of benami transaction, if we refer to clause (iii) it allows a purchase of property in the name of spouse and children provided the consideration is from the known source of the individual. The next question arises what is the known source? The simple answer to the known source will be “money that is earned legally, or on which the necessary tax is paid.” Now it is important to see the transaction from Income tax perspective. During the time of purchase of property the person paying the consideration for property has to deduct tax @1% under section 194-IA of the Income Tax Act (where the amount of consideration is more than or equal to 50 Lakhs) and deposit it with the government. There would be no tax implications in the hands of spouse or the children in whose name the property is purchased as Section 56(2)(x) of the Income tax Act exempts gift received from relatives.
For purchasing property in the name of parents or siblings, we have to refer clause (iv) of the above mentioned exceptions where two limbs need to be satisfied. First is that the person paying the consideration has to be the joint owner of the property i.e. individual cannot purchase the property in the name of the parents or siblings. To satisfy the exceptions given by benami transactions it is necessary for the person paying the consideration to be the joint owner of the property. Second limb is that the consideration has to be provided by the known source, here the meaning of known source will remain the same as mentioned above.
Income tax implications will remain the same as per above mentioned para i.e. person paying consideration has to deduct tax @ 1%. Parents and siblings will have no tax implications as they are also covered under the definition of relative given under Section 56(2)(x) of the Income tax Act.
Here the point of concern is that, if an individual has to purchase the property in the name of either parent or sibling then it will be mandatory for him to be the joint owner of the property, otherwise the property will be considered as benami property.
Once the property is declared as the benami property and the purpose of the transaction was to defeat the provision of any law or to avoid payment of statutory dues, or avoid payment to creditors, then penalty equivalent to 25% of the fair market value of the property will be levied along with rigorous imprisonment to the beneficial owner and benamidar for up to 7 years.
However if a person wants to purchase the property in the name of parents or siblings (assuming he does not want to be joint owner) then he can gift the consideration amount to the parents or siblings and then parents or siblings can purchase the property in their own name. There will be no tax implications on the said transaction as parents and siblings are covered under the definition of relative as per section 56(2)(x) of the Income tax act. By doing the transaction in this manner the property would be out of the benami law.
The above structuring is possible provided consideration is from known source and the purpose of such gift not to defeat any provision of law or to defraud any creditor.