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Define ownership proportionately at the time of registration to ensure that you don't face problems on the taxation front, experts tell Tinesh Bhasin.
When you purchase a house jointly with your wife or any other relative, make sure that the proportion of ownership is defined at the time of registration.
It will ensure that the tax liability is in proportion to percentage of ownership. Also, both the owners can take the tax benefits based on their share in the house.
If you ignore the paperwork, there can be tax-related issues later.
On selling the house, for example, an individual has to pay tax on the gains made, but s/he can save the tax by making some investments.
For this, s/he needs to invest the proceeds in a new house or invest in capital gain bonds.
A husband and wife may have pooled money to purchase a property.
In the absence of any evidence of joint ownership, one of them may not be able to get the tax benefit.
"If you look at the laws, they all need ownership to be defined at the time of registration. Property documents are the key to decide ownership even for tax purpose," says Naveen Wadhwa, general manager, Taxmann.com.
"In certain cases, however, income tax tribunals and courts have taken a lenient view based on the merits of the case and ruled in favour of the taxpayer," Wadhwa adds.
Depending on the individual case and documentary evidence, there are chances that taxpayers get the capital gains tax benefit in cases where a husband pays for the house entirely, but registers it in the name of his wife or makes her the joint owner.
Investment proof is essential
In a recent case, the Income-Tax Appellate Tribunal's Bangalore bench rejected the plea of a couple that was trying to claim exemption on long-term capital gains.
They argued that both have separately but contributed equally towards building a house on a plot of land.
In fact, when the house was let out, they split the rent between them and paid tax on it.
After they sold the property, they invested the proceeds in capital gain bonds separately.
The tax officer, however, was not convinced as the property was registered only in the husband's name.
The tribunal too didn't buy the couple's argument.
It pointed out that the property was registered in the husband's name and there was no evidence to show that the wife had contributed equally.
Also, she was a Malaysian citizen when the property was purchased. She had to, therefore, obtain Reserve Bank of India permission for buying a property in India, which she had not done.
According to a note from PwC India, the ruling highlights that 'co-ownership in a property can only be considered from the recitals of the relevant documents and not from any stated intention or claim made, which is legally unsustainable.'
Many times, a husband and wife make an arrangement where one pays for the house, and the salary of the other is used for household and other expenses.
For the couple, it's a joint effort in monetary terms, but if the wife's name is not there on the property papers and there's also no proof to show she contributed, she will not be considered as the owner.
If the couple decides to split, there can be further complications.
For a couple, the best thing to do is to opt for a joint home loan or split the responsibility for payment of home and household expenses equally between them.
Keep in mind clubbing provisions
There are times when the husband pays for the property entirely but registers it in the name of the wife or makes her a joint owner.
When such property is sold, there can be a confusion on who is responsible for the tax regarding the gains.
Many such cases have gone to the tribunal, and it has ruled that whoever has paid for the house should be responsible for the tax as well as the benefit.
For such transactions, the trail of money should prove who has contributed to the purchase.
"A family is not run on the basis of tax laws. There are many considerations for a family when they are buying a house. The tribunals have, therefore, taken a liberal view in such cases based on the evidence," says Shailesh Kumar, director, direct taxation, Nangia & Co.
The converse also holds true.
A husband may have paid for the house entirely and made the wife the joint owner or made her the sole owner.
When the house is sold, the husband has to bear the entire tax liability or enjoy the benefit.
It cannot be split for the sake of lowering the tax liability.
In such a case, the clubbing provision of income tax will apply.
Tribunals have been liberal
Tax experts say that tribunals have been liberal in cases where the assessee has sought the benefit of capital gains by investing in another property or capital gain bonds.
In a recent case, a couple sold a jointly owned property.
When they purchased a new one to save tax, it was registered only in the husband's name instead of registering it together again.
While the tax officer denied the couple the tax benefit, the tribunal ruled in favour of the taxpayers.
There have been similar cases where a couple sold a house flat.
The new one was purchased in the name of a minor daughter, or the husband registered the new property in joint ownership with his brother instead of the wife.
In all such cases, tribunals have let taxpayers take the benefit.
Illustration: Uttam Ghosh/Rediff.com
