Having a property in joint name with the family members is a standard practice in India. Some do it as an expression of gratitude towards their family members while others make it a reason for smooth succession and easy tax benefits. In most cases, it is the spouse whose name appears as a joint holder in the property, so legally the spouse is the co-owner of the property with his/her name visible in the purchase deed.
Most of us would agree that the income from the property which has contributions from both the owners (rental income or any other capital gains) should be taxed equally to both the co-owners (depending on the contribution).
As per the provisions under section 26 of the Income Tax Act, if the property is co-owned by two persons and their shares are definite and ascertainable then the tax on the income generated from such property (rental or capital gain) will be computable on the basis of shares.
The situation is further elaborated in Section 27 of the Income Tax Act which says that the person who has transferred the property (transferor) to his/her spouse will be considered as the sole owner of the property and the income from such property will be taxed under the name of the transferor.
The legal authorities pay more attention to the shares each co-owner has in the property while claiming the tax. It’s not about the legal ownership mentioned in the purchase deed rather they look at the funding pattern for the property. As per the law, each co-owner is liable for tax depending on the ratio he/she has contributed to the purchase of the property.
If in case the spouse’s name is on the purchase deed but has not contributed to the purchase of the property then the full tax liability goes to the other partner who has actually contributed to the purchase of the property. Therefore the entire income from the property will be taxed under the name of the buyer (another spouse).
Case-1 – A has bought the property and has given the name of his wife as the joint holder of the property. The ownership ratio in the purchase deed is 50:50.
A and his wife apply jointly for a home loan so the EMI will be paid by A and his wife in the ratio of 70:30.
Case 2. – A and his wife have sold out the property after 10 years for Rs. 50 Lakhs. The sale consideration of the property for tax purposes should not be 50:50 as mentioned in the purchase deed rather it should be according to the contribution of each partner. According to this consideration of the property will be divided as Rs. 35 Lakhs for A (70% of 50 lakhs) and 15 Lakhs for his wife. Similarly, the cost of acquisition will be divided as 70:30, i.e., in the ratio in which A and his wife have paid the home loan.
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At last, it is mandatory to compute the tax liability on the basis of the funding pattern (who has contributed how much in the property?) and both should be taxed accordingly whether its tax on rental income, capital gain or home loan.
