Real Estate property is a popular investment choice among people. It acts as a saving option for future expenses such as marriage, healthcare, and accidental emergencies. These properties can be either solely owned by one individual or co-owned by a couple or partners. Both cases invite the sharing of taxes and gains in the case of a property sale or rent.
Most people usually purchase immovable properties in joint names that include the name of more than one person for multiple reasons, such as the smooth succession of property funding. However, while purchasing these properties, one should also keep in mind that they must comply with the TDS rules. This blog will discuss the ways to ascertain the share of co-owners in the property and how one has to pay the TDS on the property.
What do You Mean by TDS?
To collect tax from the source of income itself, the concept of Tax Deducted at Source (TDS) was introduced. According to this concept, a person (the deductor) who must pay another person (the deductee) a specified payment type must withhold tax at source and remit it to the Central Government.
TDS can be collected from certain payments like house rents, educational and professional fees, commissions, interests, etc.
One benefit of TDS payments is that they receive credits that can be claimed against their tax liability once they fill out the annual Income Tax Return (ITR). The primary purpose of this taxation is to reduce the chance of tax evasion, but it also comes with some significant benefits for an honest taxpayer. Some people are offered tax exemption limits, and to know about the same, one should always keep up with revised and new TDS rules.
What is a Jointly Owned Property?
Jointly owned property can be any property held under the name of two or more parties. The two parties can be related in any way. For instance, they can be business partners, blood-related partners, or any other combination that justifies the reason to own a joint property. When a husband and a wife own a property together, the ownership of assets comes under marital status.
The joint-owned property undergoes several legalities such as joint tenancy, community property, or in trust. In joint ownership, both or all the property holders have equal obligations and rights to the property until death. In this case, all the parties related to the property ownership complied follow the TDS rules and are also advised to keep an eye on TDS deduction rules.
Who will Pay TDS in Joint Property?
TDS payment on property refers to the requirement of deducting a certain percentage of tax at the time of making specified payments related to property transactions. The Indian Income Tax Act mandates that when purchasing or selling property, the buyer or the seller, as the case may be, needs to deduct TDS and deposit it with the government.
The Delhi bench of the income tax department in 2018 passed a rule that said the joint buyers would not be liable to pay TDS under section 194 1A if the individual share is less than ₹50 lakhs.
While passing the order, the tribunal paid attention to the fact that each transferee was considered a separate individual, and the determining factor for applicability of section 194 1A would depend on purchase consideration paid by each party.
How can the Share of Each Co-Owner Be Verified?
The share of each co-owner in a property or business can be ascertained through various methods, depending on the specific context and agreements between the co-owners.
Here are a few common approaches:
Taxation of Rent Received for Co-Owned Property
According to the Income Tax Act (ITA), if the property is rented out, the owner is required to pay tax on the rent received. Additionally, if the property was acquired through the use of a mortgage, the owner may deduct the interest paid on the rental property. The loss from the house property, however, is limited to ₹2 lakhs per fiscal year and cannot be offset by any other income.
However, if the property has co-owners, the rental income from that home will be split up according to the co-owners shares, and each co-owner will be liable for paying taxes on their respective portions of the income.
Assesse Liable to Equal Tax on Income from House Property Where Joint Owner’s Shares are not Mentioned in the Sale Deed
As per the Delhi branch of the income tax tribunal, if two people own a house together and the sale deed does not specify how much of the house each person owns, then they will both be considered to own 50% of the house for tax purposes. This means that they will both be liable to pay tax on 50% of the income that the house generates, such as rent or Airbnb income.
This is because the ITA states that “where the shares of the co-owners in a property are not specified in the sale deed, they shall be deemed to be equal.” This means that the ITA assumes that each co-owner owns an equivalent share of the property unless there is evidence to the contrary.
Taxation of Profit on Sale of the Jointly Owned Property
When a jointly owned property is sold, each co-owner is liable to pay tax on their share of the capital gains. The amount of tax payable will depend on the co-owners’ income tax slab and the period of ownership of the property. Here are some of the tax exemptions available on capital gains earned from jointly owned property:
Section 54EC
This section allows an exemption of up to ₹50 lakhs from long-term capital gains on the sale of a residential property if the amount is financed in another residential property within 2 years of the sale.
Section 54F
This section permits an exemption of up to ₹2 lakhs from long-term capital gains on the sale of a residential property if the amount is invested in a National Pension System (NPS) account within 60 days of the sale.
Section 54GB
This section allows an exemption of up to ₹1 crore from long-term capital gains on the sale of a residential property if the amount is invested in a specified infrastructure project within 3 years of the sale.
The co-owner must ensure that they meet all the conditions of the exemption before claiming it. The co-owner should also consult with a tax advisor to determine which exemption is most suitable for their situation.
TDS on Sale of Property in Case of Joint Owners
When a property is sold, the buyer is required to deduct TDS from the total consideration paid to the seller. In the context of joint owners selling a property, the TDS liability is typically divided among the co-owners in proportion to their ownership share. Each co-owner is responsible for paying taxes on their respective share of the capital gains arising from the sale.
The buyer is required to deduct TDS on property at the prevailing rate (which may vary depending on factors such as the type of property and the total consideration) on the entire sale consideration. However, the responsibility of determining the actual capital gains and computing the tax liability lies with the individual co-owners.
TDS Rules on Sale of Jointly Owned Property
Taxation being a crucial concept, needs to be followed with utmost seriousness. Before paying taxes, everyone must focus on all TDS rules and gradual revision.
Below mentioned are a few of the TDS rules focusing on the deduction, TDS amount, and TDS exemption limit:
- According to the joint party’s new TDS rules, income tax is not levied as a group but on respective co-owners individually.
- Both partners hold legal and equal ownership of the house property, as mentioned in the registered documents.
- When two or more parties join together for joint property ownership, they are considered eligible for TDS deductions on the principal and interest amounts. As per section 80C of the Income tax act, the co-owners become eligible to avail of a benefit of ₹1.5 lakhs per person annually on the principal amount and up to ₹2 lakhs on the interest.
- To deposit the TDS, each buyer has to own the legal documents, especially the Permanent Account Number (PAN). However, the buyer is not required to own a Tax Deduction Account Number (TAN).
- TDS is deducted at a 1% rate, but if the seller does not have PAN, the deduction rate goes up to 20%.
Conclusion
When purchasing immovable properties in joint names, it is essential to consider compliance with TDS rules. By understanding the concept of TDS and its various applications, individuals can ensure a smooth succession of property funding while fulfilling their tax obligations. Determining the share of co-owners in the property is crucial, as it affects the distribution of TDS payments and tax liabilities. Staying updated with revised TDS rules and consulting with a tax advisor can provide valuable insights into optimizing tax liabilities and availing exemptions. Adhering to TDS regulations is not only a legal requirement but also contributes to a fair and transparent tax system, benefiting both individuals and the government in the long run.
Key Takeaways
- Jointly owned properties are taxed individually, not as a group.
- Each co-owner is responsible for paying taxes on their share of the property’s income and capital gains.
- The TDS liability for jointly owned properties is typically divided among the co-owners in proportion to their ownership share.
- Co-owners can claim TDS deductions on the principal and interest amounts, subject to certain limits.
FAQS
1
How do I calculate capital gains tax on joint property?
In the event of selling a jointly owned property, each co-owner is required to declare and pay the capital gains tax on their respective share of the building. It’s important to highlight that the division of the tax liability will be determined based on the “sale consideration” and “cost of acquisition” rather than the “net taxable capital gains.
2
What are the tax exemptions available on capital gains earned from joint property?
Each co-owner of a jointly owned property, whether commercial or residential, has the right to seek an exemption under Section 54EC for long-term capital gains. This exemption can be claimed by investing the indexed capital gains, up to ₹50 lakhs.
3
How the share of co-owners is fixed in a joint property?
The co-owners’ share in the property will be determined based on the ratio of their actual contributions toward its cost.
