Adding a family member’s name to a property is a common practice in India. A husband may add his wife, a son his mother, or a parent their child. Sometimes, a relative or even a close friend may be made a joint owner. In many such cases, the person whose name appears first may have paid the entire consideration, while the other person may not have contributed anything.
For a long time, such arrangements were largely a matter between family members and the registrars, with little involvement from the tax department. That is changing.
The tax department today receives information on property transactions from registrars and TDS filings. This can raise a fairly obvious question: if a person has acquired a property, does their tax return show the financial capacity to make that investment?
The answer is not always straightforward. Consider a property purchased in the names of A and B, with the entire consideration paid by A. It could be a genuine gift. A may have loaned money to B. A and B may genuinely be co-owners. Or, B’s name may have been used without any intention of giving B beneficial ownership. Each of these situations has a different tax and legal consequence.
Gift
A may have intended to gift a share in the property to B. In that case, B can genuinely own that share even though B has not contributed towards the purchase. But the question of ownership does not end the tax discussion.
Under the tax law, where a share in a property is gifted to a spouse or minor child, the parties need to consider not only how the property is held but also how the income or loss arising from it will be taxed.
Loan
The arrangement may instead be that A has advanced money to B. B uses the money to acquire an interest in the property and remains the owner of that interest.
The person who provides the money is not necessarily the owner of the asset. If it is a loan, A’s right would ordinarily be to recover the money advanced, and not to claim ownership of the property merely because A financed its purchase.
Benami
The most uncomfortable question arises when B’s name has been put on the property documents without any intention of giving B ownership. B may, in effect, only be a name-lender. This is where the Benami law can become relevant, particularly where the person shown as the owner has neither contributed towards the purchase nor received a gift or loan.
But every situation where the person paying for a property is different from the person named in the documents is not automatically a benami transaction. The Benami law does contain specific exceptions for certain family arrangements.
These exceptions, however, should not be seen as blanket protection merely because the property is held in the name of a relative. For example, a cousin.
What should the taxpayers do?
The best time to settle the nature of such an arrangement is before the property is purchased, not after a notice arrives. And before putting another person’s name on a property document, the parties should be clear about what that name represents.
If it is a gift, the intention should be clear from the outset and appropriately documented, including through a gift deed. The clubbing provisions should be considered at that stage itself, and the tax reporting should be consistent with the arrangement.
If it is a loan, the loan should be properly documented. Its terms, repayment obligations, where applicable, and movement of funds should leave little doubt about what the transaction was intended to be.
And if it is neither a genuine gift nor a genuine loan, the parties should carefully examine whether the arrangement could raise questions under Benami law. If there is some legitimate reason for including the person’s name, the documentation and subsequent conduct should support that explanation.
In all of the above situations, the taxpayer needs to be able to explain why the name appears in the property documents, but (s)he has not made any financial contribution. The property documents, flow of funds, and tax returns should all tell the same story.
A second name on a property deed may once have been a matter of family convenience; however, in an increasingly data-driven tax administration, it is also a data point. And a data point that does not fit the rest of the taxpayer’s financial story may invite a few questions.
Ashish Karundia is a practising chartered accountant and author.