Co-owners Under Person in Income Tax: An Indian Law Perspective
Co-ownership of property is a common phenomenon in India, especially in real estate. Understanding how income from such properties is taxed under the Income Tax Act, 1961, is crucial for co-owners to comply with the law and optimize their tax liabilities. This article delves into the tax implications of co-ownership under the definition of "person" as per the Income Tax Act, focusing on relevant legal provisions and practical considerations within the Indian context.
Defining "Person" Under the Income Tax Act
Section 2(31) of the Income Tax Act, 1961, defines "person" inclusively, encompassing various entities liable to pay income tax. This definition includes:
- An Individual
- A Hindu Undivided Family (HUF)
- A Company
- A Firm
- An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not
- A Local Authority
- An Artificial Juridical Person, not falling within any of the preceding categories
Crucially, co-owners of a property are taxed depending on how they hold the property: either as individuals or as an Association of Persons (AOP)/Body of Individuals (BOI).
Co-ownership as Individuals
When individuals jointly own a property, without forming a specific entity like an AOP, each co-owner is treated as an individual for income tax purposes. This is the most common scenario. In this case, the rental income from the property is assessed and taxed separately in the hands of each co-owner based on their respective share in the property.
Determining the Share of Income:
The share of each co-owner is generally determined by the ownership deed. The deed should explicitly state the percentage of ownership for each co-owner. If the deed does not specify the shares, the income tax authorities may determine the share based on other relevant evidence, such as the contribution made by each co-owner towards the purchase of the property.
Deductions and Exemptions:
Each co-owner is entitled to claim deductions and exemptions under the Income Tax Act in proportion to their share of ownership. These include:
- Section 24(a): Standard Deduction: Each co-owner can claim a standard deduction of 30% of the net annual value of their share of the rental income.
- Section 24(b): Interest on Housing Loan: If the property is acquired with a housing loan, each co-owner can claim a deduction for the interest paid on their share of the loan, subject to the limits specified in the Act. For a self-occupied property, the maximum deduction is ₹2,00,000, provided certain conditions are met (loan taken for acquisition or construction after 1st April 1999 and completed within 5 years from the end of the financial year in which the loan was taken). For a let-out property, there is no upper limit on the interest deduction.
- Chapter VI-A Deductions: Co-owners can also claim deductions under Chapter VI-A of the Income Tax Act, such as deductions under Section 80C (investments in LIC, PPF, etc.), Section 80D (medical insurance premium), and other eligible deductions, subject to the prescribed limits and conditions, based on their individual investments and expenses.
- Deduction for Municipal Taxes: Municipal taxes paid on the property are deductible from the annual value before calculating income from house property. Each co-owner can deduct the municipal taxes paid based on their ownership share.
Example:
Assume A and B jointly own a property with equal shares (50% each). The property is rented out, generating an annual rental income of ₹4,00,000. They pay municipal taxes of ₹20,000. They also have a housing loan on which they pay an annual interest of ₹1,00,000.
- Gross Annual Value (GAV): ₹4,00,000
- Less: Municipal Taxes: ₹20,000
- Net Annual Value (NAV): ₹3,80,000
- Share of NAV for each co-owner: ₹3,80,000 / 2 = ₹1,90,000
- Standard Deduction (30% of NAV): ₹1,90,000 * 30% = ₹57,000
- Interest on Housing Loan: ₹1,00,000 / 2 = ₹50,000
- Income from House Property for each co-owner: ₹1,90,000 – ₹57,000 – ₹50,000 = ₹83,000
A and B will each declare an income of ₹83,000 under the head "Income from House Property" in their individual income tax returns.
Co-ownership as an Association of Persons (AOP) or Body of Individuals (BOI)
An Association of Persons (AOP) or Body of Individuals (BOI) is formed when two or more individuals come together for a specific purpose, such as jointly owning and managing a property with a common intention to earn income. While less common in typical co-ownership scenarios, it's relevant if the co-owners actively collaborate in a business-like manner concerning the property.
Tax Implications for AOP/BOI:
- Taxation at AOP/BOI Level: The income from the property is first assessed and taxed at the AOP/BOI level. The tax rate applicable to the AOP/BOI depends on various factors, including whether the shares of the members are determinate or indeterminate.
- Determinate vs. Indeterminate Shares: If the shares of the members in the income of the AOP/BOI are clearly defined (determinate), the tax rate applied to the AOP/BOI may be the same as that applicable to an individual. If the shares are not defined (indeterminate), the AOP/BOI is taxed at the maximum marginal rate (MMR).
- Member's Liability: The income from the AOP/BOI is not taxed again in the hands of the individual members if the AOP/BOI has already paid tax on that income. However, if the AOP/BOI has not paid tax, the members are liable to pay tax on their share of the income.
- Deductions and Exemptions: The AOP/BOI can claim deductions and exemptions under the Income Tax Act, subject to the relevant provisions. For example, it can claim deductions for expenses incurred in managing the property, such as repairs, maintenance, and property taxes.
Distinction Between Co-ownership as Individuals and AOP/BOI:
The key difference lies in the intention and activity level of the co-owners. Simple joint ownership where each co-owner receives their share of the rental income and manages their taxes individually is treated as co-ownership as individuals. However, if the co-owners actively collaborate in managing the property as a joint venture with a profit motive, it could be considered an AOP/BOI.
Example:
Consider three individuals, X, Y, and Z, who jointly own a commercial complex. They actively manage the property, collect rent, and make decisions collectively. They have a written agreement defining their shares and responsibilities. This scenario is more likely to be treated as an AOP. The income will be taxed at the AOP level, and the members' shares will be taxed based on whether the shares are determinate or indeterminate.
Important Considerations and Legal Provisions
- Gift of Property: If a co-owner gifts their share of the property to another person, the gift may be subject to gift tax provisions under the Income Tax Act. (Note: Gift tax provisions have undergone changes over time. Currently, gifts received from relatives are generally exempt.)
- Transfer of Property: When a co-owner sells their share of the property, the transaction is subject to capital gains tax. The capital gain is calculated as the difference between the sale price and the cost of acquisition (plus any improvements), and the applicable tax rate depends on whether the gain is short-term or long-term.
- Legal Advice: Due to the complexities of tax laws and the potential for varying interpretations, it is advisable for co-owners to seek professional legal and tax advice to ensure compliance and optimize their tax planning.
- Joint Borrowers: When co-owners jointly take a loan for purchasing the property, each borrower is individually responsible for repaying the loan and is eligible for deductions on the interest paid. However, banks may require all co-owners to be joint borrowers.
- Benami Transactions Prohibition Act, 1988: Co-ownership arrangements should comply with the Benami Transactions (Prohibition) Act, 1988 (as amended). This Act prohibits benami transactions, where property is held in the name of one person while the beneficial owner is someone else.
- Clubbing Provisions: The Income Tax Act contains "clubbing" provisions (Section 64), which may apply in certain cases where income is transferred to a spouse, minor child, or other specified relatives without adequate consideration. These provisions aim to prevent tax evasion by transferring income to individuals with lower tax rates.
- PAN Requirement: All co-owners are required to have a Permanent Account Number (PAN) for filing income tax returns and claiming deductions.
Self-Occupied Property and Co-ownership
When a co-owned property is self-occupied, each co-owner can claim a deduction for interest paid on the housing loan, subject to a maximum limit of ₹2,00,000 in aggregate, provided all the conditions stipulated in section 24(b) of the Income Tax Act, 1961 are met. This is a significant benefit for co-owners who use the property as their primary residence. If the property is self-occupied for only part of the year and let out for the remaining period, it will be treated as a let-out property for the entire year, and the rules for let-out properties will apply.
Documentation and Record Keeping
Maintaining proper documentation is crucial for co-owners to substantiate their claims for deductions and exemptions. This includes:
- Ownership Deed: A copy of the ownership deed showing the ownership share of each co-owner.
- Loan Documents: Loan agreements, repayment schedules, and interest certificates from the lender.
- Rental Agreements: Rental agreements with tenants, if the property is let out.
- Municipal Tax Receipts: Receipts for municipal taxes paid.
- Repair and Maintenance Expenses: Records of expenses incurred on repairs and maintenance of the property.
- Income Tax Returns: Copies of income tax returns filed by each co-owner.
Conclusion
Understanding the tax implications of co-ownership under the Income Tax Act is essential for compliance and effective tax planning. Co-owners should carefully consider whether their arrangement qualifies as simple co-ownership or as an AOP/BOI, as the tax treatment differs significantly. It is highly recommended to seek professional advice to navigate the complexities of tax laws and ensure that they are maximizing their available deductions and exemptions while remaining compliant with the law. Staying informed about any amendments or changes in the Income Tax Act is also crucial for accurate tax planning.
