Chartered Accountant

Ownership of House property & Deduction on Housing Loan

Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets.

Query 1]
My father owns a plot in urban area of Nagpur and wants to gift it to me or my husband or to both based on the clarity on various doubts for which following queries are raised.

What are the taxes/levies etc. by whatever name called payable under Income Tax Act or under any other law if the plot is gifted to (a) me or (b) My husband or (c) Both.
If the plot is gifted in my name only, whether my husband can get the loan for construction of house as I being a housewife? If yes, whether he will get the Income Tax benefits for interest and repayment of principal amount even if he is not the owner of plot?
Is there any relationship between ownership and benefits under the Income Tax Act?
What will be the benefits if the plot is gifted in the name of my husband only?
If the plot is gifted in the name of both and I as already mentioned being a housewife, can my husband only get the housing loan and claim the whole amount of interest and principal as deduction under Income Tax Act or only proportionate deduction will be allowed?
What is the treatment of the Market Value of plot in the above case?
What will be your advice for financial and tax planning? [minal.1150@rediffmail.com]

Opinion:
“Gift is not only a symbol of love & affection but also a tool for tax planning.”

Gift is one of the most commonly used tool for planning or avoiding tax. By gifting the property or assets to other persons, subsequent incomes also get diverted. It has become all the more popular after cessation of Gift tax few years back. However, the concept of taxing gift is almost reintroduced by incorporating section 56(2)(vii) in the Income Tax Act-1961 which make it taxable as “Income from other Source” if the aggregate amount of gift received during the year exceeds Rs. 50,000/-. Exception is provided in respect of following 4 categories of gift/amount i.e., (a) Gift received from Relative (b) Gift received on the occasion of the marriage of an Individual (c) Gift received under a will or by way of inheritance (d) Gift received in contemplation of death of the payer.

As mentioned above, gift shall not be taxable as income if it is received from the “Relative”. Section 56(2)(vii) of the Income Tax Act-1961 considers the following person as “Relative” of the individual receiving the gift:
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).

In short, gifts of any amount received from above “relative” would not be taxed & else the recipient could end up being taxed if aggregate amount of gift during the year exceeds Rs. 50,0000/-.

[Though the meaning of the word “Relative” appears to be simple, it may not be so. One needs to be very cautious at the time of receiving the gift. At each & every occasion, the transaction of gifts needs to be examined from the angel of recipient. In regular usage, “Relative” is considered to be a cohesive term. If “X” is the relative of “Y”, it is presumed that “Y” is also the relative of “X”. Taxpayers would be surprised to see the abnormal outcome of above definition of “Relative” under section 56(2) (vii) of the Income Tax Act-1961. It may so happen that “X” is the relative of “Y” but “Y” may not be the relative of “X”. For example, if the person is giving a gift to sister’s son then we have to view the transactions from the angel of the recipient (i.e., Son– Bhanja). In this case, the gift is received by recipient from Brother of Mother (Mama) & being covered by above definition of relative in clause (iv), it would not be taxable. Now, if suppose the reverse happens. The sister’s son (Bhanja) offers the gift to the mother’s brother (Mama). Now, the recipient is the Brother of mother of the donor. In this case, donor is not the (i) spouse (ii) brother or sister (iii) brother or sister of the spouse (iv) brother or sister of either of the parents (v) any lineal ascendant or descendant (vi) any lineal ascendant or descendant of the spouse (vii) spouse of the person referred to in clauses (ii) to (vi). Thus, the gift received would be taxable in the hands of the recipient. Though the persons involved are same in both the illustrations given above, the amount would be tax neutral in the first case and taxable in the second case. To summarize, taxpayer need to go through the given definition of “relative” from the angel of recipient i.e., donee and may conclude that relative could be one sided business as far as tax treatment under section 56(2)(vii) is concerned].

In your specific case,

Gift by father to daughter or son-in-laws, individually or jointly, will be tax neutral i.e., not taxable, neither in the hands of donor nor in the hands of the donee.
Banks are offering the loan on constructions of house property over the property owned by spouse by taking it as co-applicant. So, even if the land is gifted to you, housing loan can be availed by making your husband as co-applicant in the loan documentations.

3. Taxpayer need to understand that ownership in a house property is one of the first & foremost vital pre-condition for claiming deduction towards interest on housing loan u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Without ownership in the house property, no right would emanate for deduction. The second pre-condition is the availment of loan towards the house property. Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets. In your case, the land could be gifted to you by your father and thereafter your husband could construct the house property over it and can claim housing loan benefits over it, subject to proper documentations to prove that construction (i.e., house property) belongs to your husband, the loan is his individual liability & and entire loan repayment is done by him individually.

Better & easy option would be gift of plot by your father to your husband. It would ensure unquestionable claim towards deduction u/s 24(b) & 80C.
In your case, the market value of the land will not have any implications under the Income Tax Act-1961.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com]

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