A common myth is that, since the property is co-owned, the income from the property should be taxed equally in the hands of the spouses who are the co-owners.
It is a common practice in India to buy a house property in joint names. In most cases, the buyer adds his/her spouse’s name as a joint holder for various reasons such as smooth succession and availing tax benefits. In such cases, the spouse is treated as a legal co-owner of the house property as his/her name is mentioned in the purchase deed.
Given the above, a question arises as to how to account for income such as rent and capital gains in the hands of the spouses.
A common myth is that, since the property is co-owned, the income from the property, be it, rental income or capital gain should be taxed equally in the hands of the spouses who are the co-owners.
Sharing tax liability
This myth arises on account of the provisions of section 26 of the Income Tax Act, 1961 (“Act”), which states that when two or more persons own the property and their respective shares are definite and ascertainable, the share of each such person shall be assessed separately for computing the house property income.
However, more clarity is provided in section 27 of the Act, according to which, the transferor of the property will be deemed the owner of the property if he/she has transferred the property for inadequate consideration to his/her spouse. In such situations, the income arising from the immovable property (i.e. rental income or capital gains income) is to be clubbed in the hands of the transferor.
In view of the above, it is pertinent to note that for the purpose of income tax, the tax authorities look at the share of each spouse from a different perspective. Rather than legal ownership as mentioned in the purchase deed, the tax authorities look at the funding pattern for the property. Each spouse has to pay tax on income in the ratio in which he/she has contributed to the cost of purchase of the house property. In case the spouse’s name is stated in the purchase deed but if he/she has not contributed to the purchase of house property, then the spouse who has funded the property is considered to be the sole owner of the property and hence, the entire income from property will be taxed in the hands of such spouse.
Let us understand this by way of an example. Mr A has purchased a house property in joint name of his wife and the ownership ratio mentioned in the purchase deed is 50:50. Further, Mr. A and his wife have availed a home loan for the purchase of house property. The home loan EMIs are paid by Mr A and his wife in the ratio of 70:30. Let us consider that the house property is sold by them after 10 years for Rs 20 lakhs. At the time when the house property is sold, for tax purpose, the sale consideration should not be divided between Mr A and his wife in the ratio of ownership which is 50:50 but it should be divided in the ratio in which Mr A and his wife have contributed to purchase of house property. Accordingly, the sale consideration to be considered for Mr A will be Rs 14 lakhs (i.e., Rs 20 lakhs * 70%) and the sale consideration to be considered for his wife is Rs 6 lakhs. Similarly, the cost of acquisition will be divided as 70:30, i.e., in the ratio in which Mr. A and his wife has paid the home loan.
Thus, it is important to take note of the funding pattern of a house property when computing the tax on capital gains and rental income in the hands of spouses who are co-owners.(The writer is a Partner with Deloitte India. Mousami Nagarsenkar, Bhavin Rajput, Prachi Phansikar and Nikita Malkan also contributed to the article and are with Deloitte Haskins & Sells LLP.)Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.