Shalini Jain
Buying a house property jointly with your spouse is a common practice in India, but taxpayers should be mindful of the tax implications in the case of jointly-owned property. Factors such as percentage share of co-owner, actual contribution towards the cost of the property and the intent of buying the property jointly play an important part in determining the taxability of the rental income as also of the capital gains when the property is sold.
As per the provisions of Income Tax law, where the share of the co-owners in a property is definite and ascertainable, each co-owner is liable to tax individually on the income earned from the house property which is related to his/her share of ownership.
However, determining the share of co-ownership of the house property has been a matter of debate in various judicial precedents. For example, as per the purchase agreement, husband and wife may be specified as equal co-owners in the house property, but the entire cost of house property may be borne by the husband alone if the wife is a home-maker and does not have any source of income. In such a case, it may be prudent to tax the entire income from such house property, whether in terms of annual rental income or capital gains income at the time of sale, in the hands of the husband as per the clubbing provisions of income tax law.
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In another situation where the wife also has her own independent sources of income, and both husband and wife contribute towards the cost of the house property which is clearly ascertainable but without specifying their individual share in the joint property, income in the form of annual rent or capital gains on sale should be taxable in the hands of husband and wife in the ratio of their capital contribution to the cost. This approach is supported by Section 45 of the Transfer of Property Act. Similarly, any loss incurred from the house property, in the form of interest paid on home loan or loss at the time of sale, should also be attributed to the co-owners as per the above approach.
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 the purpose of taxation of income. In the said case, the ITAT concluded that the wife was also a salaried taxpayer, and thus, can 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.
Thus, taxation of income from a jointly-owned house property remains a matter of litigation and taxpayers should be cautious of the fact pattern which is applicable to them in order to reduce the chances of a negative outcome in case of litigation.
It would be prudent to clearly define the percentage of ownership of each co-owner in the purchase agreement and maintain records of capital contribution towards the cost by each co-owner, wherever applicable. The logic followed for reporting of income in the individual tax return should be consistent over the duration of ownership and at the time of sale. The taxpayers should also be able to justify the intent of buying the house property jointly to strengthen their case along with other documents to justify the share of co-owners.
(The author is Tax Partner, People Advisory Services, EY India. Akshay Sharma, Senior Manager, EY India, also contributed to this article.)
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