Contribution is key to claiming tax benefit

If a house is sold and the proceeds are used to buy another, whoever contributed to the purchase of the first house can claim exemption on capital gains tax

Whenever an individual sells a house, he needs to pay tax on the capital gains made in the transaction, unless the money is used to buy another house or is invested in certain instruments. The taxation of these gains can get tricky if the property is jointly owned.

What if a couple sells a jointly-owned house and then wants to buy another property, either in the name of the husband or the wife, using the proceeds? Can the other partner still save on capital gains, despite no ownership in the new house? After changing jobs and relocating to Hyderabad, Sandeep Kumar Sinha wants clarity on this issue. He sold off his house in Bengaluru, jointly owned with his wife. The couple plans to buy a new property in Hyderabad in the wife's name.
 
According to Section 54 of the Income Tax Act, on selling a house, an individual can save capital gains tax if he uses the proceeds to buy a new one within two years from the date of sale. Tax experts say Sinha can buy a house in his wife's name and will still get to save on capital gains tax. "Income tax provisions do not specify that the new house property should be purchased in the name of the assessee exclusively. As both the husband and wife contributed their sale proceeds to the purchase of the new house, they would be considered its beneficial owners," says Anand Dhelia, director-people advisory services, EY.

Spouse has not contributed but is joint owner
If a couple sells a jointly owned house but the spouse, say the wife, had not contributed any money to it, will she still need to pay tax? Experts say that the capital gains are taxable in the hands of the spouse who had funded the property. "Merely because the spouse is a co-holder in a property which has been funded by the partner in entirety should not vitiate the position of the one who has funded the purchase," says Partho Dasgupta, partner-direct tax at BDO India. He points out that a similar case was heard at the Mumbai Income Tax Appellate Tribunal, where the ruling came in the taxpayer's favour.

A couple had sold off a jointly-owned property in Mumbai within three years of purchase and incurred short-term capital gains. The husband had suffered losses in stocks and had set off the short-term capital gains arising from the property sale against the short-term capital losses incurred from the sale of shares. Under the I-T Act, short-term capital losses can be set off against short-term capital gains arising in the same financial year and only the surplus, if any, is taxable.

The tax officer didn't allow the husband to claim the entire capital gains, as the property was jointly held, and asked the wife to pay her share of capital gains tax. She informed the officer that the entire investment was made by her husband, as was reflected in his book of accounts. The couple got an order in their favour. According to Dasgupta, "It is imperative that the spouse funding the property be able to substantiate the claim before the authorities."

Who gets to claim tax benefit

• A person can avoid paying capital gains tax on sale of a house by purchasing another house
• Complications arise in the case of jointly owned properties
• If both spouses had contributed to a property that is sold, both can claim capital gains tax exemption, even if the new house is purchased in one spouse's name   
• If a house to whose purchase only one spouse had contributed is sold, only that spouse can claim tax benefit
• Assume a house to whose purchase one person had contributed is sold. A new house is bought in the name of a close family member. Person who had contributed to purchase of the first house gets to the claim tax benefit

Owner buys new house in name of close relative
If an individual sells a house and buys a new one entirely in the name of his wife, child, or parents, without himself being a co-owner, can he still get capital gains tax benefit?

Section 54 and 54F allow an individual to invest in a new house to save on capital gains tax, the idea being to give an impetus to house construction. "Where this purpose is served and the taxpayer has invested the capital gains in the construction or purchase of a new home, the tax exemption shall be allowed," says Suraj Nangia, partner at Nangia & Co.

He points to a 2013 Delhi high court verdict, where a husband purchased a house in the name of his wife. The court ruled that non-granting of relief under such a scenario would defeat the purpose and intent behind the introduction of Section 54. Dhelia of EY says that the individual must ensure that the new residential property purchased or constructed is not sold within a period of three years from the date of purchase or construction. If the new residential property is transferred within three years, the exemption will be revoked.