Explained: Taxation of jointly held property

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It is a common practice for people to buy property in joint names. The general rule should be that the rental income from such property and the capital gains at the time of sale of such property, may be shared by all the joint owners as per the proportion of their holding in the property.

They may become joint owners by way of gift, inheritance etc. For example, If Mr. Nishant and sister Ms. Nishita inherit a house property from their father. The Will mentions that Mr. Nishant and Ms. Nishita should inherit 50% of the property each. Accordingly, the rental income will be taxed in the hands of Nishant and Nishita equally. Whenever the house property will be sold, the sale consideration, expenses and cost of acquisition will also be split 50-50 between the brother-sister duo.

However, we notice that in some cases, the buyer of the house property adds the 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.

It is pertinent to note that for the purpose of income tax, the tax authorities look at the share of each spouse as different assessee. Over and above the legal ownership as mentioned in the purchase deed, the tax authorities look at the funding pattern for the property.

Calculation

Let us understand this by way of an example. Mr. Aditya has purchased a house property in the joint name of his wife Mrs. Aditi and the ownership ratio mentioned in the purchase deed is 50:50. Further, Mr. Aditya and Mrs. Aditi have availed a home loan for the purchase of this house property. The home loan EMIs are paid by Mr. Aditya and Mrs. Aditi in the ratio of 60:40. There is a rental income on the house property is Rs. 2,40,000 per annum. The rental income for Mr. Aditya will not be Rs. 1,20,000 which is 50% of rental income as per the ratio of holding mentioned in the purchase deed. The rental income for Mr. Aditya will be as per the funding of the property which means Rs. 1,44,000 i.e. 60% of the rental income will be allocated to Mr. Aditya and the balance 40% to his wife.

Let us assume that the house property is sold by them after 8 years for Rs 2 crores. At the time when the house property is sold, for tax purpose, the sale consideration should not be divided between Mr. Aditya and his wife in the ratio of ownership which is 50:50 but it should be divided in the ratio in which Mr. Aditya and his wife have contributed to purchase of house property. Accordingly, the sale consideration to be considered for Mr. Aditya will be Rs 1.2 crores and the sale consideration to be considered for Mrs. Aditi will be Rs 80 lakhs. Similarly, the expenses for sale of property and the cost of acquisition will be divided as 60:40, i.e., in the ratio in which Mr. Aditya and Mrs. Aditi have repaid the home loan. The cost of acquisition will be subject to indexation benefits.

By the above example, we now understand that 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 the property will be taxed in the hands of such spouse.

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.

Income for tax purpose

Let us see practical case study of Mr. Rohan who purchased house property for Rs 1 crore on a loan of Rs 80 lakh. Rohan and his wife Rohini are 50-50 owners of this house property as per the purchase agreement. Rohini is a homemaker and the down payment amount has been paid from the joint account where Rohan deposits his savings. The complete EMI is paid by Rohan from his salary. The couple earns a rental income of Rs 1,20,000 from this house property in the joint account. What is the taxability of this amount?

As we understand, Rohini is a homemaker, and accordingly may not be getting any income. Also, the amount paid as a down payment for the purchase of the house from the joint account constitutes Rohan’s savings. Accordingly, in substance, Rohan has funded the purchase of the house, irrespective of the fact that the payment was done from a joint account. The ratio of 50-50 as considered in the purchase agreement is disregarded for income tax purposes. However, Rohini still remains the joint legal owner of the house. Accordingly, the full rental income of Rs. 1,20,000 will be considered as Rohan’s income for income tax purposes irrespective of the fact that it is received in a joint account.

(The writer is a chartered accountant and founder at Nimit Consultancy)