Though I-T Act does not prohibit taxpayers from buying a new house in the name of close relatives, it is better that the owner of the property sold becomes the title holder in the new house property to get LTCG tax exemption.
Any property sale in India attracts capital gain tax on the gains arising therefrom under the Income Tax Act. Though the gains arising on sale of property get taxed as capital gains, relief against certain capital gains are provided upon satisfaction of the prescribed conditions.
One of such reliefs is available under Section 54 of the Act, in respect of long-term capital gains arising on the sale of residential house property if the same are reinvested in specific assets within the prescribed time limit. One may, within a period of one year before or two years after the date of sale of house property, invest the capital gains to purchase one residential house in India to claim exemption. Alternatively, one residential house can be constructed within a period of three years to claim the said exemption.
In this way, home sellers get a tax comfort and at the same time, investment in the real estate sector is encouraged by purchase or construction of a new residential house. However, such benefits are not free from legal nitty-gritties.
Buying property in joint name
Complexity arises when the seller invests in new property not in his name but in the name of his close relatives. Buying a home in joint names with close relatives is quite common among homebuyers in order to bequeath assets or to provide financial security to them. Being aware of the legal nitty-gritty in such cases has now become a sanity check, considering the litigations surrounding the allowance of capital gains exemption.
The act of acquiring the property in relative’s name may not always be embraced by the tax authorities. It may lead to the matter being litigated by the tax authorities where the sellers are not the title holders in new property.
This issue was recently dealt in a ruling delivered by the Mumbai bench of Income Tax Appellate Tribunal (ITAT). In this case, the taxpayer stated that the name of his brother as co-owner was included for the sake of convenience only and the entire investment for the purchase of new property along with stamp duty and registration charges were paid by the taxpayer. It was alleged by the tax officer that exemption in proportion to the taxpayer’s share in property should be allowed and balance gains should be taxed. However, the ITAT took a note of the taxpayer’s contention and on the basis of the facts provided the desired relief and allowed entire capital gains as deduction.
Judgements contrary to the above, have also been delivered by the appellate authorities where taxpayers were disallowed the capital gains exemption in similar circumstances, i.e., properties jointly bought in the name of close relatives. Such contradictory judgements may leave the sellers in a state of dilemma as to the correct position to be taken in such a scenario.
The Act, however, does not impose any restriction on the person in whose name the gains have to be invested. The homebuyers should be at ease to invest the capital gains in the name of close relatives. The objective is to grant exemption to the taxpayer with respect to the amount re-invested in acquisition of new residential house. A liberal interpretation should be given to the provisions of the Act and legal heirs of the taxpayer should be included while deciding in such peculiar cases.
Though the Act does not prohibit the taxpayer from buying the new house in the name of close relatives, homebuyers should try to stay clear of legal proceedings. Hence, it is better that the owner of the property sold becomes the title holder in the new house property.
The writer is partner Nangia Advisors LLP. Inputs from Shruti Gupta