Purchase of a home in India is a considerable investment financially, with assorted tax implications laid down in the Income Tax Act of 1961. Purpose of ownership of property could be usage for personal life, investment purposes, rental value, or commercial activities which modify the strategy of taxation. Tax liabilities concerning a property rely on its self occupation category, rented condition, or treating it as rent.
Apart from legal ownership, deemed ownership is also important in determining tax obligations. According to Section 27 of the Income Tax Act, deemed ownership occurs when a person is not the legal owner of a property but is treated as such for tax purposes. The provision is meant to avoid tax evasion by transferring the rights of ownership while maintaining effective control over the property.
Examples of deemed ownership are gifts to a spouse or minor child for less than adequate consideration, co-ownership agreements, inheritance, lease arrangements for more than 12 years, and possession under an agreement for sale. The laws regarding deemed ownership help prevent tax evasion and ensure equitable taxation of real estate income. Property owners must understand these tax laws to better manage their investments and comply with income tax in India.
Section 27 of the Income Tax Act 1961
Section 27 of the Income Tax Act of 1961 stipulates situations under which a person, even if not the outright owner of a property, is regarded as a deemed owner under income tax. This section aims at avoiding the transfer of ownership rights by an individual while still retaining control over the property to avoid paying taxes.
This section holds that tax duties cannot be avoided by merely passing on the ownership while remaining in control of a property. One can become a deemed owner through different modes such as transfer to a spouse, transfer to a minor child, long leases, cooperative housing scheme, or possession under an agreement for sale. Knowledge of these regulations is critical for both buyers and sellers of property in order to abide by tax rules and to promote more efficient real estate transactions.
Through this provision, the following are identified as deemed owners of property:
1. Transfer of Property to Spouse Without Proper Consideration
Where an individual gives residential property to his or her spouse without receiving adequate monetary consideration, the former owner is treated as the owner for tax purposes. The rent or notional income arising on the property is chargeable to tax in the hands of the transferor and not the spouse. Where, however, the transfer of property is in accordance with a divorce agreement, Section 27 is not applicable.
For example, if a husband donates a rented house worth ₹50 lakh to his wife without any consideration, he will still be considered the deemed owner and will be subject to tax for the rental income.
2. Gift of Property to a Minor Child
Assigning property to a minor child for less than consideration can result in the person being treated as the owner and later required to pay taxes on the earnings from the property. This rule applies to transfers to a married minor daughter. At age 18, the child will be deemed to be in legal possession of the property, and income earned from it will be taxable in their name.
Example: A father gives a property yielding an annual rent of ₹2 lakh to his 10-year-old son. As the son is a minor, the father will remain the deemed owner and the rental income will be taxed in his name.
3. Owner of an Impartible Estate
An impartible estate is defined as property belonging to one legally but inherited and used by a number of relatives, as often the case with ancestral lands. The owner who has rights of ownership over an impartible estate is known as the deemed owner and is liable for taxation accordingly.
Example: A person inherits a family palace that cannot be shared among the heirs but is used jointly by all members of the family. The title holder of the property is considered to be the assumed owner and will be taxed on any revenue accrued from the property.
4. Member of a Cooperative Society, Company, or Association
When a person buys property within a cooperative society, business, or association, he or she has rights of ownership even though he or she does not have direct legal ownership since the title remains with the society or company. For taxation purposes, the person is still treated as a presumed owner.
For instance, if a person buys an apartment in a cooperative house, they retain sole possession of the apartment, whereas the cooperative retains the legal title. In this case, the purchaser is treated as the deemed owner and has to pay taxes on any income from the property.
5. Lease a Property for More Than 12 Years
One who rents a house for a term of 12 years or longer, with possibility of transferability of the lease, is legally accepted as being the owner though the legal ownership lies with the original owner. Renewals would be included under the 12-year period. Lessees pay taxes for rental or notion income.
For example, if one signs a 15-year lease for an office property with the right of subletting, the lessee is considered the deemed owner for tax purposes, even though legal title rests in the hands of the landlord.
6. Ownership of Property under Agreement of Sale (Section 53A of Transfer of Property Act).
Where a purchaser is in possession of a property under a registered agreement of sale, even if the title has not been legally transferred, the purchaser is deemed to be the presumed owner. To be considered for this position, the purchaser must have either paid the consideration in full or in part and entered into possession of the property. In addition, the seller cannot unilaterally cancel the agreement.
Example: Take the case of a person who buys an under-construction flat and completes possession in March 2024 under an agreement of sale with the formal transfer of title to be in 2025. For the purpose of taxation, such a person is considered to be the deemed owner from March 2024, and the rental income or deemed rental income has to be accounted for accordingly.
Tax Implications of Deemed Ownership Under Section 27
- Taxability of Rental Income – Deemed owners have to report rental income under “Income from House Property” and pay the respective taxes. Self-occupied properties are exempt from tax on rental income.
- Tax Deduction for Home Loan Interest – The deemed owner can claim a deduction of a maximum of ₹2 lakh per year under Section 24(b).
- Wealth Tax Implications (Before 2015) – Earlier, presumed ownership might result in a higher wealth tax liability; however, wealth tax no longer exists.
- Capital Gains Tax on Sale – In case the presumed owner sells the property, they are subject to capital gains tax regardless of legal ownership status.
Landmark Judgments
There have been several milestone judgments that have interpreted the meaning of Section 27 of the Income Tax Act of 1961, particularly in relation to deemed ownership and taxability of income from house property. These judgments have broadened the ambit of deemed ownership under Section 27 by emphasising possession, control, and economic benefits over legal title. The Supreme Court and High Courts have always held that persons who are deriving benefits from the ownership of property, even if not registered, are liable to disclose their income and pay their tax dues. This stance encourages equitable taxation and prevents tax evasion in real estate transactions.
1. CIT v. Podar Cement Pvt. Ltd. (1997)
Key Issue: May a person who is in possession of a property with rights of ownership but without legal title be treated as an owner for purposes of taxation?
Judgment: The term “owner” in Section 22 (Income from House Property) should be liberally interpreted. A person who owns, holds, and enjoys a property to the full can be considered an owner, although the title has not been legally conveyed to his name. This decision broadened the concept of deemed ownership in accordance with Section 27.
Impact: This case explained that the meaning of ownership for income tax purposes is founded on actual possession and control and not merely on legal title.
2. Mysore Minerals Ltd. vs. CIT (1999)
Key Issue: Whether a person who owns and enjoys a property without a title deed registered can be deemed an owner under taxation.
Judgement: The word “owner” must not be limited to the mere holders of legal title. A person who derives satisfaction from possession, control, and economic gains from a property is subject to tax on the income derived from such a property.
Impact: This judgment validated the decision in Podar Cement, affirming that rights of ownership take precedence over the title deed in taxation issues.
Conclusion
Under Section 27 of the Income Tax Act of 1961, persons who own, manage, or receive monetary benefits out of a property are considered owners for taxation purposes, even if they do not have formal ownership. This mechanism helps inequitable taxation of real estate income and averts evasions of taxes through nomenclatural transfer. Milestone court rulings have strengthened the importance of effective ownership rights versus mere status of registration. Taxpayers need to know about the idea of beneficial ownership in order to strategise their investments effectively and abide by the property tax laws. The recognition of both beneficial and legal ownership ensures that the tax system is facilitated with accountability, openness, and justice in the taxing of immovable property.
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