Joint Ownership of Property-Tax & legal challenges
When two or more people hold the title of a property but their share is not specifically mentioned, it is known as 'tenancy-in-common'. All the owners can use the entire property and every co-owner has an equal share in the property. With the death of one of the joint owners, the interest in the property does not pass to the other co-owners. The property goes to the person named in the Will of the deceased or as per the applicable succession law. The Legal heir then becomes a tenant-in-common with the surviving co-owners.
Joint tenancy: It is a form of co-ownership where the property is owned by two or more persons in equal shares. This type of tenancy provides rights to ownership of the property for the co-owners who outlive other co-owners. Unlike tenants-in-common where one joint tenant dies, his interest automatically passes on to the other surviving joint tenant(s). There are 4 legal requirements that help create a joint tenancy:
(1) The joint tenants own an undivided interest in the property as a whole; each share is equal, and no one joint tenant can ever have a larger share.
(2) The estates of the joint tenants are vested (meaning fixed and unalterable by any condition) for exactly the same period of time—in this case, the tenants' lifetime.
(3) The joint tenants hold their property under the same title.
(4) The joint tenants all enjoy the same rights until one of them dies. Under the right of survivorship, the death of one joint tenant automatically transfers the remainder of the property in equal parts to the survivors. When only one joint tenant is left alive, he or she receives the entire estate.
Section 44 of the Transfer of Property Act, 1882 deals with transfers by one co-owner, where one co-owners of immovable property are legally competent in that behalf, transfers his share of the property, and the transferee acquires the transferor's right to joint possession or use of the property. On the contrary, if there are specific conditions in the agreement that give co-owners exclusive rights to certain parts/portions of the property, a joint owner can sell his portion to whom he chooses.
If the joint tenants mutually agree to sell the property, they must equally divide the proceeds of the saleas disagreement over the disposition of property is common, courts sometimes intervene to divide the property equally among the owners. If one joint tenant decides to convey her or his interest in the property to a new owner, the joint tenancy is broken and the new owner has a tenancy in common.
Tenancy in common is a form of concurrent ownership that can be created by deed, will, or operation of law. Several features distinguish it from joint tenancy: A tenant in common may have a larger share of property than the other tenants. The tenant is also free to dispose of his or her share without the restrictive conditions placed on a joint tenancy. Unlike joint tenancy, tenancy in common has no right of survivorship. Thus, no other tenant in common is entitled to receive a share of the property upon a tenant in common's death; instead, the property goes to the deceased's heirs.
Tenancy by the entirety is a form of joint tenancy that is available only to a Husband & Wife. It can be created only by will or by deed. As a form of joint tenancy that also creates a right of survivorship, it allows the property to pass automatically to the surviving spouse when a spouse dies. In addition, tenancy by the entirety protects a spouse's interest in the property from the other spouse's creditors. It differs from joint tenancy in one major respect: neither party can voluntarily dispose of her or his interest in the property. In the event of Divorce, the tenancy by the entirety becomes a tenancy in common, and the right of survivorship is lost.
Rights of a co-owner
A co-owner is entitled to three essentials of ownership: the right to possession, the right to use and the right to dispose of his share of the property, if it is clearly stated in the deed. Therefore, if a co-owner is deprived of his/her property, he/she has a right to be put back in possession.
Is co-ownership better?
Yes, if you are a married couple. Co-owning a house with your spouse has many tax benefits, too. In case of a joint ownership, the husband as well as the wife individually will be able to claim deductions for up to Rs 1.5 lakh for interest and up to Rs 1 lakh on principal under the Income Tax Act. It also enables easy transfer of property to your children.
Taxation of jointly owned property
Status of joint owner for tax purposes
The Income Tax Act has divided the tax entities into various categories. All individuals are taxed under the category of an ‘Individual’. However, if more than one individuals come together, for doing business or to own a building or just happen to co-own any building/estate, etc., they may be taxed under any of the various statuses, like that of partnership firm which includes LLP (Limited Liability Partnership). They may also be taxed as Association of Persons (AOP) or as Body of Individual (BOI).
With respect to property jointly owned by co-owners, Section 26 of the Income Tax Act gives clear guidelines for taxation of the share of such co-owners in a building. The share of income in the property, may be either in the form of rentals or may even be capital gains arising at the time of sale of such building. The section provides that in case the share of each of the co-owners is clearly defined and is ascertainable, then, the respective share of each co-owner shall become taxable in their hand as an individual and not as a BOI or AOP or partnership.
However, the building owned by a HUF is not a property that is owned jointly but the same is owned by the HUF in its own capacity. Thus, the income of such HUF property shall be taxed in the hands of the HUF as a separate tax entity and will not be apportioned among the members of the HUF.
How the share of each co-owner can be ascertained?
If both, the husband and wife, are added to the agreement as purchasers of the property, it is not always that both own the property in equal share. Many a times, additional persons are added in the agreement, for the purpose of ensuring smooth succession of the property. So, the respective share of the co-owners in the property will be in the ratio in which they have actually contributed towards the cost of the property.
The cost may either be by way of down payment, or it may also be by way of their ratio in the home loan taken. This can be ascertained from the bank statements of the co-owners. Hence, if you have not contributed anything towards the purchase consideration, you will not be treated as a co-owner of the property for income tax purposes, even when your name appears in the agreement as a buyer of the property.
The property may also be acquired by way of inheritance, either under a will or by way of intestate succession. In case of a will, the ownership ratio shall be decided on the basis mentioned in the will of the testator. If the property is jointly inherited, otherwise than under a will, the ratio of ownership will be as per the law of succession applicable to you based on your religion. However, in case some of the legal heirs have relinquished their right in the property by mutual consent, the ownership ratio shall stand modified to that extent.
Taxation of rent received for jointly owned property
In the case of self-occupied, jointly owned property, the tax laws allow you to have one house as self-occupied, on which there is no tax liability.
However, in case more than one jointly owned properties are used for self-occupation, you need to choose one property as self-occupied and the rest are treated as having been let out. For such properties, which are deemed to have been let-out, you have to offer the notional rent. This is the amount for which the property is reasonably expected to be let-out, for taxation. Such notional rent is apportioned in the ratio of ownership, as ascertained on the basis discussed above. For a property that is actually let-out, the rent received is required to be apportioned in the ownership ratio as determined. The rent so apportioned, is treated as the annual value of the property.
Taxation of Capital Gain from the sale of the jointly owned property
If the co-owned property is sold, each co-owner has to offer the capital gain as applicable on his share of the building. It may be noted that the apportionment shall be made at the ‘sale consideration’ and ‘cost of acquisition’ level and not at the ‘net taxable capital gains’ level. So, in the case of long-term capital gains on sale of the jointly owned property, whether commercial or residential, each one of the co-owner shall be entitled to claim exemption under Section 54EC, by investing the indexed capital gains up to Rs 50 lakhs. Likewise, the conditions of not owning more than one residential house as prescribed under Section 54F for claiming exemption from long-term capital gains shall also be considered for each of the co-owners and not for all the co-owners taken together.
TDS on sale of property in case of joint owners
In 2018, the Delhi bench of the income tax tribunal ruled that joint buyers will not be liable to pay any TDS under Section 194 1A, if the share of the individual is less than Rs 50 lakhs. The order by the tribunal came, while passing its judgment in a case of one Vinod Soni. While passing the order, the tribunal also noted that since each transferee was a separate individual, the purchase consideration paid by each will be the determining factor for the applicability of Section 194-1A.