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How to pay tax and claim deductions for joint home ownership

January 25, 2017 10:35 IST

How to pay tax and claim deductions for joint home ownership

If a couple is registered as joint owners of a property, the tax authorities expect both of them to show their income or capital gains from the house in their tax returns, says Arvind Rao.
Illustration: Uttam Ghosh/Rediff.com

When a house is purchased jointly by a couple, they should clearly define their proportion of ownership right at the time of the registration.

Benefits like tax deduction on repayment of home loan principal and interest should then be enjoyed in proportion to their ownership.

Tax on any income arising from the house, such as rental earnings and capital gains arising from the sale of the house, should also be paid in the same proportion.

Unless such clarity is maintained, couples who jointly own houses could get into conflict with the tax authorities.

Emotions vs legality

Usually, in single-income families, the working spouse contributes the entire capital required to buy the house, takes a loan in his/her name, and also pays the equated monthly instalment (EMI) for the loan.

The property could be in joint names.

In such cases, usually, the principal earner claims all the tax benefits like deduction on home loan interest and principal repayment.

The Income-Tax Act, however, treats each owner as a co-owner of the property.

If the agreement is silent on ownership percentage, it is deemed that the property is owned equally by all the buyers whose names are mentioned in the agreement.

Co-ownership implies the income and related deductions should be offered to tax by each of the co-owners in their respective tax returns.

Paper trail helps

One such issue came before the Mumbai Income Tax Tribunal recently, wherein the taxpayer, a medical professional, filed a return of income declaring an income of Rs 55,230.

During the assessment, the tax officer, based on the Annual Information Return (AIR) data available to him, observed that there was a sale of a residential property, which was not reflected in the taxpayer's return of income for that year.

In her defence, the taxpayer said the property was purchased by her husband out of funds from his account and the flat was accordingly shown in his balance sheet.

She further submitted that although the flat was registered in their joint names, her husband was the owner of the property and the capital gains arising from the sale of the flat had been accordingly offered to tax in his return of income.

The tax officer was not convinced with this explanation.

He was of the view the whole arrangement was aimed at avoiding taxes, as the taxpayer's husband had set off short-term capital losses on the sale of shares against the short-term capital gains earned on the sale of the property.

In addition, as the taxpayer was the first holder of the property, the tax officer was of the view that 50 per cent of the short-term capital gains arising from the sale of the property should be taxed in her hands.

Accordingly, the tax officer assessed the total income of the taxpayer at Rs 48,78,865.

At the first appellate level, the authority was convinced with the taxpayer's claim.

It directed the tax officer to delete the addition of Rs 45,38,254 on account of short-term capital gains.

Not happy with the order, the tax officer filed a second appeal with the Mumbai Tax Tribunal.

He argued that as the taxpayer was a joint owner of the property, she, along with her husband, was liable for taxation of 50 per cent of the short-term capital gains arising from the sale of the property.

The taxpayer argued that in her own case in an earlier year, when her tax returns were reopened by the tax officer to verify the sources of investment for the same property, the tax officer had accepted the fact that though the taxpayer's name appeared as a co-owner, the entire investment for the acquisition had been made by her husband.

The taxpayer further denied the tax officer's claim by stating that the setting off of losses against the gains was a mere coincidence since the flat had been purchased in an earlier year, whereas the shares had been bought and sold only during the relevant year.

On hearing both sides, the tax tribunal observed there was no dispute by the tax officer, vide his earlier order, that the investment in the said flat was made by the assessee's husband, even though the flat was registered in joint names.

As the source of funds for the property could be clearly traced to the assessee's husband, coupled with the fact that the gain arising from the sale of flat was offered to tax by the assesse's husband, the tax tribunal held that the first appellate authority was right in directing the tax officer to delete the addition on account of the short-term capital gains in the hands of the taxpayer.

Thus, the case was decided in favour of the assessee.

Demarcate early

The case sets a good precedent for taxpayers to understand where the law stands on registered ownership of a property vis-a-vis its financial ownership.

Taxpayers need to understand and establish the right nexus between ownership and tax on the income earned, and also the permissible deductions available under the law.

The demarcation in financial ownership should be clear right from the first step, which is the registered agreement, highlighting the proportion of ownership between the spouses.

Second, filings for tax deduction at source (TDS) on property payments should be made in the corresponding manner.

In the recent past, taxpayers have been receiving notices from the TDS department wherein a discrepancy has been observed in terms of data available with the registration department vis-a-vis the TDS filings done.

Third, on an annual basis, the claim for interest deduction and/or offering the rental income to tax should be aligned to the proportion in accordance with the first two steps.

The principal earner claiming deduction of the home loan interest and the repayment of home loan in his returns and the non-earning spouse offering the entire rental income in her returns is definitely not efficient tax planning and could lead to troubles with the tax officer.

Arvind Rao is a chartered accountant and certified financial planner.

Arvind Rao
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