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Joint Ownership in House Property-Income Tax Implications

joint-ownership-in-house-property-income-tax-implications

In India, it is very common to own a house property jointly with spouse or children for a smooth succession or availing a higher loan amount. The income tax implications are different for joint owners of house property. Separate provisions are there in the Income Tax Act, 1961.

In the Income Tax Return forms notified for the assessment year 2020-21, it is provided that a taxpayer who owns a house property jointly with one or more persons cannot file ITR-1 or ITR-4.


    Introduction

    A person owns a house property either singly or jointly. There are various factors that a person decides before registering the house property either on his own name alone or jointly with other persons who may or may not be relatives.

    There are various pros and cons involved in both types of ownerships under the general properties law. However, the discussion of this article is confined from the perspective of income tax only. 

    Income Tax incidence on a House Property

    Under the Income Tax Act, 1961 the followings are the incidences of income-tax which may arise from a house property whether singly owned or jointly owned:

    Events or happenings
    Incidence of Income Tax
    Acquisition of a house property
    TDS obligation  u/s 194-IA may arise, if acquired from a resident
    TDS obligation  u/s 195 may arise, if acquired from a non-resident
    Gift income u/s 56(2) may arise
    Construction of a house property
    TDS obligation u/s 194M may arise
    Occupation of a house property
    Annual Value to be determined. It is ‘Nil’ in case of self-occupied house property.
    House property on rent
    Rental Income from house property is taxable u/s 22
    Sale of a house property
    Capital Gains income may arise

    Under income-tax law, the benefits given for owning a house property multiplies if a property is owned jointly with spouse or children or any other relative of the individual or friend. 

    Buying or owning a house is a dream of millions. Government policies also support the dreams of the people. Various policies like housing for all and other schemes or yojanas are introduced by the government to promote owning a house. 

    Apart from the policies. the government also promotes housing by announcing various tax benefits to the owners of the house properties.

    What is a Joint Owner in a house property

    If a person owns a house property with more than one person then such a property is called a jointly owned house property. In contrast to this, if house property is owned by only one person then the property is called singly owned house property.

    Each person is called a joint owner of the house property.

    Co-owner of house property: A joint owner of a house property is called as co-owner of the house property. Co-owner and joint owner is synonymous for income tax purpose.

    When a house property is jointly owned by one or more persons then each joint owner is known as co-owner. In a similar manner, Co-ownership means where a single house property is owned by more than one person. In other words, when two or more persons hold title to the same property it is called Co-ownership or Joint ownership.

    Every joint or co-owner has a proprietary right of the entire property. Any sale of the property has to be done with the consent of all co-owners involved. However, if the conditions in the agreement give co-owners exclusive rights to certain parts/portions of the property, a co-owner can sell his portion to whom he chooses.

    Income tax implications for joint owners of properties

    It is a common practice in India to buy house property in joint names. In most cases, the buyer adds the spouse’s name or children's name as a joint holder for various reasons such as smooth succession, easy transfer of property to children, etc.

    Many times, co-owners are added in a property to avail a higher amount of bank loan to acquire the property where the individual's income is not sufficient to avail a high amount of loan. 

    Under general laws, the spouse will be treated as a legal co-owner of the house property as his or her name is mentioned in the registered deed.

    It is a common myth that where a house property is co-owned, the income from the property should be taxed equally in the hands of the co-owners. But this is not the case all the time.

    The co-ownership or joint ownership of a house property for income-tax purposes is different from the general laws. A person who is normally a co-owner of a house property under the general laws may not be a co-owner of the same house property under the income-tax laws.

    Therefore, it is pertinent to understand who is co-owner as per the Income Tax Act.

    Who is co-owner as per Income Tax Act 


    The Income Tax Act, 1961 has not defined the term co-owners of a house property. It only contains guidelines for the taxation of the share of such co-owners in house property.

    Section 26 and section 27 of the Income Tax Act, 1961 are noteworthy to discuss.

    Section 26 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.

    So, section 26 mere provides how the income from house property shall be taxed in the hands of each co-owner.

    Further reading of section 27 clarifies that the transferor of house property will be deemed to be the owner of the property if he has transferred the property for inadequate consideration to his or her spouse.

    Therefore, when a husband finances the entire consideration for the acquisition of a house property but includes the name of his wife as a co-owner or joint owner, it is the husband who is the owner of the house property and not his spouse.

    Under the income tax law, the husband will be deemed to be the owner of the property and not the spouse. Even the spouse will not be considered as a co-owner of the house property under income tax

    Any income arising from the house property will be taxed in the hands of the husband only. 

    On the other hand, if both the husband as well as the wife finances the consideration for the acquisition of house property and both are named as owner in the registered deed then both the husband and the wife are co-owners of the property

    Assuming both have contributed an equal amount for the acquisition, both are 50:50 co-owners under the income tax law. 

    In this case, any income arising from the house property will be apportioned equally between the spouses and taxed separately in the hands of the husband as well as in the hands of the wife. 

    Hence, under the income tax law, the share of each spouse is seen from a different perspective than the legal ownership as mentioned in the registered deed. 

    It is the funding pattern of the property that determines the owners or co-owners of a house property. Each spouse has to pay tax on income in the ratio in which he or she has contributed to the cost of purchase of the house property. 

    The rule is very clear. If you have not contributed or funded the acquisition price, you are not the co-owner of the property even if your name appears in the deed. You are a co-owner in the ratio of investment or funding to the purchase price of the property. 

    Under the income tax law, the proportion of investment in the property will determine the ownership status in a property.

    However, in the case of inherited property, the ratio of ownership in the property will be decided on the basis of legal documents.

    Let us understand the division of income between the spouse with an example.

    Example 1: Mr. and Mrs. Rakesh has acquired a flat for Rs. 40,00,000. Both are working couples and both have contributed Rs. 20 Lakh each for the acquisition. No home loan is taken for acquiring the flat.

    The flat is rented out to a tenant for a monthly rent of Rs. 20,000. The municipal tax for the year was paid by both amounting to Rs. 4,000.
    Other information:
    Income from Salary of Mr. Rakesh - Rs. 20,00,000.
    Income from Salary of Mrs. Rakesh - Rs. 12,00,000.
    Investment qualified for deduction u/s 80C - Rs. 2,00,000 for both.

    Compute the total income of Mr. and Mrs. Rakesh.

    Computation of Total Income:
    Particulars
    Mr. Rakesh
    Amount (in Rs.)
    Mrs. Rakesh
    Amount (in Rs.)
    Income from Salary
    20,00,000
    12,00,000
    Income from House Property  
    (See Note-1 below)
    82,600
    82,600
    Gross Total Income
    20,82,600
    12,82,600
    Less: Deduction u/s 80C
    1,50,000
    1,50,000
    Total or Taxable Income
    19,32,600
    11,32,600



    Note 1: Computation of Income from house property for each co-owner
    Rental Income [(20,000 x 12)/2]
    1,20,000
    1,20,000
    Less: Municipal taxes paid
    2,000
    2,000
    Net Annual Value
    1,18,000
    1,18,000
    Less: Standard Deduction of 30% on Net Annual Value
    35,400
    35,400
    Income from house property
    82,600
    82,600
    Note 2: The maximum amount of deduction u/s 80C is limited to Rs. 1,50,000


    After discussing the status of joint owners (or co-owners), let us discuss some of the tax incidences on certain typical natures of income from a co-owned property.

    Taxation of rental income from a jointly (or co-owned) owned property

    A house property may be a self-occupied or deemed to be let-out or actually let-out property.

    Self-occupied house property:

    Prior to 2019, only one house property was allowed to be self-occupied. If an individual owns more than one house property, except one, the other house property will be deemed to be let-out. When a property is deemed to be let-out, the notional rental income is charged to tax from that property.

    Budget 2019 has increased the limit of self-occupied house property to two. From 2019-20, an individual can own two residential house properties as self-occupied house properties without any tax incidence on notional rental income.

    In the case of a self-occupied house property, the income from such property is taken as 'Nil'.

    Let-Out house property:

    When a jointly owned house property is let-out on rent, the rental income is chargeable to tax.

    Where the joint owner has not contributed to the purchase price of the property, then the entire rental income will be taxed in the hands of that joint owner who has funded the purchase consideration in his individual capacity.

    The deduction from the rental income will be allowed to such an owner only. In this case, neither the income or the deduction will be apportioned between the joint owners for the reasons stated earlier in the preceding paragraphs.

    Example 2: Mr. Rakesh has acquired a flat for Rs. 40,00,000 which was fully paid by him. however, while registering the purchase deed, he has added and included the name of his wife in the deed as a joint owner.

    The flat is rented out to a tenant for a monthly rent of Rs. 20,000. The municipal tax for the year was paid by both amounting to Rs. 4,000.

    In this case, even though Mr. Rakesh has added the name of his wife in the deed as a joint owner, however, for income tax purposes, only Mr. Rakesh will be considered as the owner of the house property by virtue of section 27.


    His wife will not be considered as co-owner in the house property for income tax purposes.


    The entire rental income will be taxed in the hands of Mr. Rakesh. No part of the income will be taxed in the hands of his wife.

    Deduction of interest on housing loan in case of joint ownership

    Self-occupied house property:

    In the case of self-occupied house property, the income is taken as 'Nil'. However, if the house property is acquired with borrowed capital or home loan, then the interest paid on such a home loan will be allowed as a deduction which will only result in 'loss'.

    In case the co-owner has invested in the house property then the loss shall be distributed among the co-owners in the ratio of investment in the house property.

    The benefit of holding an asset in joint or co-ownership is explained. Suppose, the interest paid on the home loan taken to acquire the house property during a year is Rs. 3,00,000.

    In the case of single ownership, the maximum amount of loss on account of home loan interest is limited to Rs. 2,00,000. So in the above case, in this case, the taxpayer can avail of a maximum of Rs. 2,00,000 as a set-off of loss from other income. The remaining unabsorbed loss of Rs. 1,00,000 will be wasted and can never be claimed.

    Instead of single ownership, if the house property is co-owned with the spouse and if both the spouses have taxable income, the loss of Rs. 3,00,000 will be divided equally between the spouses assuming both have invested equally in the property.

    Both can claim a loss of Rs. 1,50,000 from their respective taxable income. The loss will reduce their taxable income and thus the ultimate tax liability.

    Let-out house property:

    If the house property is let out then the treatment of loss on account of interest paid on home loan will be slightly different.

    In the case of a let-out property, there is no limit on the interest payment on home loan. In other words, the interest of more than Rs. 2,00,000 can be claimed as deduction from rental income.

    However, there is a rider. The set-off of loss in the current year (i.e. the year in which loss first happens) cannot exceed Rs. 2,00,000. The difference of a let-out property with a self-occupied house property is that in case of a self-occupied house property, the loss is lost forever but in case of a let-out property, the loss amount in excess of Rs. 2,00,000 can be carried forward for set-off against rental income for the next 8 (eight) assessment years.

    In case the co-owner has invested in the house property then the loss shall be distributed among the co-owners in the ratio of investment in the house property.

    The benefit of holding an asset in joint or co-ownership is explained. Suppose, the interest paid on the home loan taken to acquire the house property during a year is Rs. 3,00,000.

    In the case of single ownership, the maximum amount of loss on account of home loan interest is limited to Rs. 2,00,000. So in the above case, in this case, the taxpayer can avail of a maximum of Rs. 2,00,000 as a set-off of loss from other income. The remaining unabsorbed loss of Rs. 1,00,000 will be carried forward for the next 8 assessment years to be set-off from income under the head house property.

    Instead of single ownership, if the house property is co-owned with the spouse and if both the spouses have taxable income, the loss of Rs. 3,00,000 will be divided equally between the spouses assuming both have invested equally in the property.

    Both can claim a loss of Rs. 1,50,000 from their respective taxable income. The loss will reduce their taxable income and thus the ultimate tax liability.

    Hence, the entire interest payment of Rs. 3,00,000 will be absorbed in the same year itself.


    Deduction u/s 80C of Principal repayment on housing loan in case of joint ownership

    Similar to tax benefits of interest paid on home loan, the deduction u/s 80C for principal repayment of the same home loan is divided among the co-owners in the ratio of ownership. For this, it is necessary to repay the loan installments from the bank account of each co-owners. If the EMI is debited from one account, it is advisable to fund the same account by both or all the co-owners.

    In case the co-owner has not contributed any sum towards the purchase consideration, then only the person who has fully funded the purchase price is eligible for deduction u/s 80C.

    The maximum amount of deduction that can be claimed u/s 80C is Rs. 1,50,000.

    Taxation of profit on sale or capital gains from a jointly owned property

    The profit on the sale of house property is known as capital gains under the income tax law. he capital gains may be short term capital gains or long term capital gains depending on the period of holding of assets since its acquisition. In the case of inherited property, the period of holding will start counting from the date of its holding by the previous owner(s).

    Under the income tax law, if house property is held for less than 24 months then gain arising from sale or transfer of such house property will be short term capital gains.

    If house property is held for 24 months or more then gain arising from sale or transfer of such house property will be long term capital gains.

    Any capital gains will be taxed in the hands of the owner of the house property. The computation of capital gains will remain the same whether the house is self-occupied property or a rented one.

    As stated earlier, in the case of a jointly owned property, it is very important to define the ownership ratio of each co-owner to determine their tax liability. 

    In the case of a jointly purchased property, ownership ratio will be determined with reference to the amount of investment in the property by each co-owner for acquiring the property. The mere mention of the name of one of the joint persons in the registered deed does not make him owner for the computation of income under the Income Tax Act.

    If the co-owner has not contributed anything for purchase of property (mostly happens in case the joint name is with housewife) then he or she will not be treated as co-owner.

    In the case of inherited property or property received under a gift, the ratio of ownership in the property will be decided on the basis of legal documents.

    When a jointly owned property is sold then the sale consideration is required to be split between exch co-owner. If the sale deed mentions the sale consideration of each co-owner separately, then the same shall become the 'Full value of consideration' for the transfer of the property.

    Instead, if the sale deed mentions a consolidated sale consideration for the transfer of the property then the same should be split in the ratio of ownership in the property between each co-owner to determine the 'Full value of consideration'.

    After determining the Full value of consideration, the cost of acquisition for each co-owner shall be reduced to compute the capital gains for each co-owner separately. For a long term asset, the benefit of indexation is available.

    Example 3: Mr. and Mrs. Rakesh has acquired a flat for Rs. 30,00,000 on 10-01-2005. Both are working couples and both have contributed Rs. 15 Lakh each for the acquisition. No home loan is taken for acquiring the flat.
    On December 20, 2019, the house property was sold by them for a consideration of Rs. 1.35 crore. As per sale deed with the buyer, the buyer will pay the consideration in the ratio of 50:50 to each of the co-owner separately.
    Compute the Capital Gains income of each co-owner.

    Computation of Capital gains

    Particulars
    Mr. Rakesh
    Amount (in Rs.)
    Mrs. Rakesh
    Amount (in Rs.)
    Full value of consideration
    67,50,000
    67,50,000
    Less: Indexed cost of acquisition
    [(20,00,000/113)x289]
    38,36,283
    38,36,283
    Long Term Capital Gains
    29,13,717
    29,13,717

    Exemption from Capital Gains for jointly owned property

    Long term capital gains arising from the transfer of residential house property can be saved by investing the capital gain amount in the prescribed manner.

    In the case of jointly owned property, each co-owner shall invest his share of capital gains in the eligible assets to save the capital gains tax liability. It is not necessary that the new assets should be held in joint names. Each co-owner can acquire a new asset in his or her single name also.

    In the given example-3, suppose Mr. and Mrs. Rakesh has decided to invest in NHAI Bond specified u/s 54EC. In such a case, they invest the Long Term Capital Gains of Rs. 29,13,717 in the bonds.

    The maximum amount of investment u/s 54EC is Rs. 50 Lakh. Since the share of each co-owner is less than Rs. 50 Lakh, each can invest the entire capital gains in the bonds and can save the tax.

    On the contrary, had the property was owned singly, then the capital gains would be Rs. 58,27,434. Out of this, only Rs. 50 lakh could have been invested and tax was required to be paid on the remaining capital gains of Rs. 8,27,434 [Rs. 58,27,434 - Rs. 50,00,000].

    TDS on jointly owned house property

    Finance Act,2013 has inserted a new section 194-IA in the Income Tax Act, 1961 with effect from June 1, 2013.

    This section requires deduction of tax at source @ 1% on the sale of an immovable property (except rural agricultural land), in case the consideration is Rs. 50 lakhs or more.

    Immovable property means any land (but rural agricultural land) or building (a Shop, a house, flats, bungalows, etc.).

    TDS can be deposited by using the Permanent Account Number (PAN) of the taxpayer under this section. No need to obtain TAN by the individual buyer.

    Under this section, the purchaser of immovable property, who will make the payment to the seller, is required to deduct tax. 

    TDS is required to be deducted at 1% of the consideration paid, but if the seller does not have PAN, then the rate of deduction will be at a higher rate of 20%.

    Where consideration is paid by each co-owner:

    If a property is acquired jointly by two or more persons, then the above rules will be applied to each joint owner or co-owner separately.

    In such a case, the threshold limit of Rs. 50 Lakh will apply for payment of consideration by each of the co-owners of the property.

    If an immovable property is valued at Rs. 60 Lakh and the same is acquired by two persons jointly with equal contribution then each co-owner has to pay Rs. 30 Lakh each to the seller and hence no TDS will be applicable. None of the co-owners are required to deduct TDS as stipulated in section 194-IA.


    In case each co-owners share of consideration is more than Rs. 50 Lakh then each co-owner has to deduct and deposit the TDS separately under their respective PAN. If there are two co-owners, the TDS needs to be deposited by two separate challans.

    It is advisable to pay the TDS from the respective co-owners bank account.

    Where consideration is not paid by each co-owner:

    In many cases, it may happen that the entire consideration is paid by one person and the other person is merely added as co-owner in the registered deed. In normally happens in the case of husband and wife where the husband makes payment of the full consideration and the name of the wife is added for other family reasons.

    In this case, since the entire payment is made by the husband, the TDS needs to be deducted on the full consideration of the immovable property by the husband only. the consideration cannot be split between the co-owners.

    Restriction on use of ITR-1 and ITR-4 in case of jointly owned property

    The notified ITR forms in ITR-1 and ITR-4 for AY 2020-21 has restricted the use of these forms in case the taxpayer owns a house property in joint-ownership with two or more persons.

    The notification that notified the ITR forms did not clarify whether the joint ownership shall be interpreted under general laws or as per income tax laws.

    However, the good news is that this restriction has been rolled back by the Income Tax department within a week of its notification.

    By a Press Release dated January 9, 2020, the CBDT has granted relaxation in eligibility conditions for filing of Income-tax Return Form-1 (Sahaj) and Form-4 (Sugam) for Assessment Year 2020-21.

    The press release states that a person who owns a property in joint ownership was not made eligible to file the ITR-1 or ITR-4 Forms who is otherwise eligible to file the ITR-1 or ITR-4 Forms.

    After examining the representations, the Board has allowed a person, who jointly owns a single house property, to file ITR-1 or ITR-4 if he or she is otherwise eligible to file ITR-1 or ITR-4.

    Hence, there is no restriction on the use of ITR-1 or ITR-4 by a person who owns a house property in joint ownership with one or more persons if he is otherwise eligible to file the said ITR forms. The changes notified in the ITR-1 and ITR-4 forms have been withdrawn.

    Deduction u/s 80EEA for jointly owned properties

    Budget 2019 has gifted the taxpayers an additional deduction u/s 80EEA of the Income Tax Act, 1961 of up to Rs. 1,50,000/- for interest paid on loans borrowed up to 31st March 2020 for purchase of an affordable house (residential house property only) valued up to Rs. 45 lakh. 

    Therefore, a person purchasing an affordable house will now get an enhanced interest deduction up to Rs. 3.5 lakh comprising deduction u/s 80EEA up to Rs. 1.50 Lakh and existing deduction of Rs 2 Lakh u/s 24.




    The same rule of division of the additional benefit of interest paid on the eligible loan will be allowed in the hands of all the co-owners in the proportion of the ownership ratio. This will apply if all the co-owners have contributed to the purchase price of the residential house property.

    In case the co-owner has not paid or contributed any money in the purchase price of the property, the benefit of additional deduction will be available only to the person who has funded the purchase price.


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    12 Comments

    1. extremely well written article clarifying all doubts of income and taxation of jointly owned popety

      ReplyDelete
    2. Thanks for such a detailed explanatory article.

      Has there been any clarity on whether joint ownership of property is to be based on general laws (Transfer of property Act etc) or Income tax laws?

      My specific query is
      - An assessee owns three properties (all under joint ownership as per General laws with other parties).

      - However, as per the concept of co-ownership (IT Act), he is only co-owner in one of the properties.

      - For the other two properties, he is not a co-owner as he has not contributed anything in the acquisition of those properties

      - Then in this case, whether he is required to file ITR-1 or ITR-2 for AY 2020-21 (and consequently AY 2019-20 since with the rollback of the amendment, the applicability of ITR-1 is same for both AY 2019-20 and AY 2020-21).

      Is this rationale correct - Since the assessee is not the co-owner of two of the properties, therefore he can only have income from a single house property (wherein he is the co-owner) and accordingly ITR-1 is applicable for him for both the AY 2019-20 and AY 2020-21 (assuming the assessee has no other source of income)?

      ReplyDelete
      Replies
      1. If a persons is a owner or co-owner of more than one house property he cannt use ITR 1 both for for AY 2019-20 and AY 2020-21.

        Delete
      2. Thanks. W.r.t your response, is the ownership or co-ownership to be determined on the basis of IT Act or General laws?

        Delete
      3. It should be as per IT Act since income will be apportioned as per IT Act

        Delete
    3. I have purchased flat in 2003 and as my income was not much so my sister and dad was included in loan. My dad expired in 2007 and afterwards I got mutation done to remove their name. Recently I sold that flat and buyers bank gave sanctioned amount split into two. One on my name and other on my sister name. I had been paying all the EMIs till I had loan. Now I had purchased new flat and want to pay full amount ( contribution received from buyer bank to me and my sister account) in that house. Do my sister need to pay long term capital gain.

      ReplyDelete
      Replies
      1. From the limited facts, it appears to me as 'Yes'.

        Delete
    4. My mother want to sold a residential land property on her name which she had purchased for 7 lakh, 4 years back, now she is selling it for rs 30 lakh, and now she want to purchase another land property of 70 lakh as a co owner with me, investing all her capital gain and remaining would be shared by me, Would capital gain tax be exempted when she acts as a co owner.

      ReplyDelete
      Replies
      1. Capital gains exemption is not available for new investment in land-be as a co-owner or single owner.

        Delete
    5. Very well written.thanks for explaining each point in detail

      ReplyDelete