1. Joint ownership of property is a prevalent trend throughout India. The sale of jointly held properties can have significant tax implications and co-owners need to understand the rules to ensure compliance and optimize tax outcomes.
2. This article aims to explain the Capital Gains Tax and available exemptions on the sale of jointly owned property with the help of Illustrations.
3. Illustration 1: Mr. V Jain held a property jointly with his brother Mr. Ajay Jain. The property was originally purchased by Mr. Ajay who had full possession of the property. Even the entire purchase consideration was made by Mr. Ajay only. V Jain’s name was added by his brother out of natural love & affection.
Mr. Ajay sold the said property for Rs. 54 lakhs during the FY 2014-15. The Income Tax officer observed that there was no family arrangement under which Jain had relinquished his right to the property before the sale. Thus, he held that Mr. V Jain’s share of the sale proceeds of Rs. 27 lakhs would be taxable in his hands as capital gains.
Mr. V Jain then approached the ITAT. It is held by the ITAT, Mumbai Branch that Mr. V Jain had neither paid for the property nor received any proceeds from the sale. Thus, no capital gains tax liability could be imposed on him. V. Jain v Income Tax Officer (ITAT Mumbai)
4. Difference between Legal Owner & Beneficial Owner of the Property: The Income Tax Appellate Tribunal (ITAT), Mumbai bench, distinguished between a legal owner and beneficial owner of the property.
The legal owner refers to a person whose name is included in the property ownership, often out of love & affection – such as a spouse or sibling. In contrast, the beneficial owner is the one who has funded the purchase and receives the sale proceeds when the property is sold.
5. The ITAT emphasized that merely having one’s name on the property title does not automatically establish ownership. Therefore, in cases where the sale proceeds are received entirely by the beneficial owner, the individual whose name was included only out of love & affection, is not liable to pay tax on Capital Gain.
6. Illustration 2: Mr. Arpit & his father jointly own a residential flat in Mumbai. The flat was purchased by the father in 2009, while he was still studying and he had no source of income. They now wish to sell the flat and want to know the tax implications for each of them.
As a thumb rule, 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 funding in the property, unless there are circumstances to justify otherwise (e.g., gift, etc.).
In the instant case, as the entire funding was done by the father and presuming there is no specific act of the property being gifted to Mr. Arpit by his father, the entire capital gain should be reported and taxed in the father’s income tax return.
In case, the property was gifted by the father to Mr. Arpit and Mr. Arpit now intends to sell it, the resulting capital gain will be taxable in Mr. Arpit’s hands. The cost of acquisition, to compute capital gains, will be the amount originally incurred by his father at the time of purchase in 2009
7. Relevance of Funding Patterns in Capital Gain Taxation for Co-owner Spouses: The funding pattern is a key factor in determining capital gains tax liability when a property is co-owned by spouses. In such cases, the tax liability on the sale of the property should be apportioned based on the actual contribution made towards the purchase, rather than the ownership ratio mentioned in the purchase deed.
8. Illustration 3: Mr. Anuj sold a residential property for Rs. 80 lakhs. The property was purchased jointly in the names of Mr. Anuj and his wife, Mrs. Sangeeta, with the ownership recorded as 50:50 in the purchase deed.
A home loan was taken jointly by Mr. and Mrs. Anuj, and the EMIs were paid in the ratio of 60:40 by Mr. Anuj and Mrs. Sangeeta, respectively.
To compute capital gains, the sale consideration should be apportioned based on the actual financial contribution made by each co-owner. Accordingly, Rs 48 lakhs (60%) of the sale consideration will be attributed to Mr. Anuj, and Rs. 32 lakhs (40%) to Mrs. Sangeeta.
Similarly, the cost of acquisition and any expenses related to the sale will also be apportioned in the same 60:40 ratio, in line with their respective contributions toward the property purchase.
9. Share of co-ownership: Determining the share of co-ownership of the house property has often been a matter of debate in various judicial precedents. While both spouses may be mentioned as equal co-owners in the purchase agreement, the entire cost of the property is sometimes funded by the husband especially when the wife is a homemaker with no independent source of income.
In such a case, it may be appropriate to tax the entire capital gains arising on the sale of the property in the hands of the husband, in accordance with the clubbing provisions under the Income Tax Act.
10. Clubbing Provisions: Under the Income Tax Act, clubbing provisions are applicable when an individual transfers a residential property or the income arising from it to a spouse, minor child, or certain relatives such as a daughter-in-law, without adequate consideration. In such cases, any capital gain arising from the sale of the property is not taxed in the hands of the transferee but is instead clubbed with the income of the original transferor
11. In a scenario, where the wife has her independent sources of income, and both spouses contribute towards the cost of the house property – with their respective contributions being identifiable, but without explicitly mentioning ownership shares. The capital gain arising on sale should be taxed in the hands of husband & wife in the proportion to their respective capital contributions.
The above-mentioned approach has been accepted by the tax authorities in various cases. However, Delhi’s Income Tax Appellate Tribunal (ITAT) recently pronounced that where the purchase agreement did not specify the percentage of ownership of husband and wife, both should be treated as equal owners of the house property for taxation of income.
In the said case, the ITAT concluded that the wife was also a salaried taxpayer, and thus, could be held as an equal owner in the house property, although her actual capital contribution was less than 6 percent of the total cost of the house property.
12. Capital Gain Exemption on sale of jointly held properties: Section 54 of the Income Tax Act provides exemptions on the capital gains arising from the sale of residential property. However, due to certain ambiguities in its provisions, the application of this section often leads to differing interpretations, making capital gains tax exemption on property transactions a frequent subject of litigation.
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.
13. Illustration 4: Ms. Tejal sold residential house property, jointly owned with her husband. The Capital Gain after accounting for indexation cost was computed at Rs. 1.30 crores.
Ms. Tejal along with her husband had purchased a new residential house property for a total consideration of Rs. 2.31 crores out of which her investment is said to be Rs. 1.76 crores. She is entitled to claim a deduction under section 54 to the extent of her investment in new residential property.
It is held by the ITAT Mumbai in the case of Smt. Tejal Kaushal Shah v Income Tax Officer that there is no restriction on the assessee to claim deduction under this provision whether as a co-owner of one or more residential properties or on the purchase of a residential property as a co-owner.
14. Conclusion: The tax implication of jointly-owned house property continues to be a subject of litigation. Taxpayers should specify the ownership share of each co-owner in the purchase agreement and maintain proper documentation of the capital contribution made by each, wherever applicable.
Additionally, the taxpayers must be able to justify the intent behind purchasing the property jointly to strengthen their position during assessments and ensure compliance with taxation provisions.
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Disclaimer: The article is for educational purposes only.
The author can be approached at caanitabhadra@gmail.com
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You ought to have considered section 45 of the Transfer of Property Act,1882
Section 45 in The Transfer Of Property Act, 1882
45. Joint transfer for consideration.—
Where immoveable property is transferred for consideration to two or more persons and such consideration is paid out of a fund belonging to them in common, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property identical, as nearly as may be, with the interests to which they were respectively entitled in the fund; and, where such consideration is paid out of separate funds belonging to them respectively, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property in proportion to the shares of the consideration which they respectively advanced.
In the absence of evidence as to the interests in the fund to which they were respectively entitled, or as to the shares which they respectively advanced, such persons shall be presumed to be equally interested in the property.