Income Tax rules for property purchased in wife’s name: Tax liability arises when you sell a flat at a higher price or when you rent it out to a tenant. In the hope of reducing such tax liability, many people tend to buy a house property in the name of their spouses. However, this trick to save tax doesn’t work as per the rules.
Transferring money to the wife’s bank account to buy a flat in her name doesn’t give the husband any freedom from the capital gains tax liability arising after the sale of such property or the tax liability on income earned by renting it. Transferring the ownership of the flat to one’s spouse also doesn’t absolve the person from tax liability. Let us understand this with two situations:
First, when the property is transferred to wife’s name without consideration
When an individual transfers a house property to his spouse without adequate consideration (or receiving money in lieu of such transfer) then such individual is deemed to be the owner of transferred property under Income Tax rules.
“Section 27 of the Income Tax Act provides that an individual transferring any house property without adequate consideration to their spouse shall deemed to be the owner of the house property so transferred,” says Dr Suresh Surana, Founder, RSM India, a tax consultancy firm.
Also, any rental income or capital gains arising out of such transferred property is taxed in the hand of the deemed owner.
“Any rental income or capital gains derived from such house property shall be taxable in the hands of such individual/deemed owner,” says Dr Surana.
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What the above means is that even if you transfer the ownership of the flat to your wife, without taking adequate payment for such transfer, you will not be free from the tax liability on any income from the said property.
Second, when an individual transfers money to his wife’s account and uses it to buy a flat in her name.
Suppose a man sends money to his wife’s account and buys a flat with that money in her name by making all payments from her account. In this case, the expert says that the transfer is of money and not the house property. Therefore, the clubbing provision under section 64 of the Income Tax would be applicable. Any income arising from the sale of such property or by renting it would be subject to tax in the hands of the husband.
“In the given case, the transfer being made is of money and not house property and as such the clubbing provisions u/s 64 would be applicable as opposed to the provisions of deemed ownership u/s 27 of the IT Act,” says Dr Surana.
“Even the Gujarat High Court in the case of Thakar (KD) vs CIT (1979) 120 ITR 190 (Guj) provided that where the property transferred is not a house property but a cash amount from which the wife of the assesssee purchased the house, it was held, it could not be said that the transferor could be a fictional owner u/s 27(i) of the IT Act,” he adds.
According to the expert, rental income and capital gains arising from such house property would be subject to tax in the hands of the transferor (similar to the provisions of Section 27).
When the above will not apply?
Provisions of Section 27 section will not apply if the transfer of house property is made against adequate consideration or in connection with an agreement to live apart, says Dr Surana.